EX-99.1 2 y91928a5exv99w1.htm EX-99.1 exv99w1
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Exhibit 99.1
(ITT LOGO)
 
     , 2011
 
Dear ITT Corporation Shareholder:
 
I am pleased to inform you that on January 11, 2011, the Board of Directors of ITT Corporation (“ITT”) approved a plan to separate ITT into three independent, publicly traded companies. Under the plan, ITT would execute tax-free spin-offs of its Defense and Information Solutions business, Exelis Inc. (“Exelis”), and its water-related businesses, Xylem Inc. (“Xylem”). Following completion of the transaction, ITT will continue to trade on the New York Stock Exchange as a highly engineered industrial products company that supplies solutions in the aerospace, transportation and energy markets. Immediately following the completion of the spin-offs, ITT shareholders will own all of the outstanding shares of common stock of Exelis and Xylem. We believe that this separation is in the best interest of our company and its constituents, as these three businesses are well-positioned to create significant value for shareholders as standalone companies.
 
ITT has a long history of knowing when the time is right to take transformational steps to create more value for our shareholders. We did this in 1995, and we are doing it again. We are taking the actions necessary to turn one powerful multi-industrial into three strong standalone businesses — each with a mandate to grow and each with the ability and the resources to make that happen. I am confident that each of these businesses will leave the gate with all it needs to succeed — first and foremost, talented leadership teams who know what it takes to excel; second, an employee base that always puts our customers first, and that takes a proud tradition of engineering excellence and innovation very seriously; and third, a will to win in the marketplace that is second to none. I am confident in the CEOs we have chosen to take us forward. They are all seasoned ITT executives. They are all ready, willing and able. They are all motivated by our history and have a keen focus on the future. They are ready to launch these companies, and they are ready to take them to the next level.
 
The spin-offs will be completed by way of a pro rata distribution of Exelis and Xylem common stock to our shareholders of record as of 5:00 p.m., New York time, on October 17, 2011, the spin-off record date. Each ITT shareholder will receive one share of Exelis common stock, and one share of Xylem common stock, for each share of ITT common stock held by such shareholder on the record date. The distribution of these shares will be made in book-entry form, which means that no physical share certificates will be issued. Following the spin-offs, shareholders may request that their shares of Exelis and Xylem common stock be transferred to a brokerage or other account at any time.
 
The spin-off is subject to certain customary conditions. Shareholder approval of the distribution is not required, nor are you required to take any action to receive your shares of Exelis and Xylem common stock.
 
Immediately following the spin-offs, you will own common stock in ITT, Exelis and Xylem. ITT’s common stock will continue to trade on the New York Stock Exchange under the symbol “ITT.” Both Exelis and Xylem intend to have their common stock listed on the New York Stock Exchange under the symbols “XLS” and “XYL”, respectively.
 
We expect the spin-offs to be tax-free to the shareholders of ITT. The spin-offs are conditioned on, among other things, the receipt of a ruling from the Internal Revenue Service and an opinion of counsel confirming that the spin-offs will not result in the recognition, for U.S. Federal income tax purposes, of income, gain or loss to ITT or its shareholders.
 
The enclosed Information Statements, which are being mailed to all ITT shareholders, describe the spin-offs in great detail and contain important information about Exelis and Xylem, including historical combined financial statements. We urge you to read the Information Statements carefully.


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I want to thank you for your continued support of ITT. We look forward to your support of all three companies in the future. We aim to continue earning your trust by delivering excellent results that will propel our companies — and your investment — into a very bright future.
 
Yours sincerely,
 
Steven R. Loranger
Chairman, President and Chief Executive Officer
ITT Corporation


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(EXELIS LOGO)
 
Exelis Inc.
 
          , 2011
 
Dear Exelis Inc. Shareholder:
 
It is our pleasure to welcome you as a shareholder of our company, Exelis Inc., a leader in Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) related products and systems and information and technical services, which we supply to military, government and commercial customers in the United States and globally.
 
As an independent, publicly traded company, we believe we can more effectively focus on our objectives and satisfy the capital needs of our company, and bring more value to you as a shareholder, than we could as an operating segment of ITT Corporation.
 
Our business has a rich history, distinguished by our strong relationships with our customers and our unified focus on “One Team, One Mission.” We take tremendous pride in building innovative solutions to customer challenges. We know that to excel in the current marketplace we must anticipate customer needs and demonstrate adaptive ingenuity in all we do. We are ready to do just that.
 
We expect to have Exelis common stock listed on the New York Stock Exchange under the symbol “XLS” in connection with the distribution of Exelis common stock by ITT.
 
We invite you to learn more about Exelis by reviewing the enclosed Information Statement. We look forward to our future as an independent, publicly traded company and to your support as a holder of Exelis common stock.
 
Very truly yours,
 
David F. Melcher
President and Chief Executive Officer
Exelis Inc.


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Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.
 
 
SUBJECT TO COMPLETION, DATED OCTOBER 5, 2011

INFORMATION STATEMENT

Exelis Inc.
 
1650 Tysons Boulevard, Suite 1700
McLean, Virginia 22102
 
Common Stock
(par value $0.01 per share)
 
This Information Statement is being sent to you in connection with the separation of Exelis Inc. (“Exelis”) from ITT Corporation (“ITT”), following which Exelis will be an independent, publicly traded company. As part of the separation, ITT will undergo an internal reorganization, after which it will complete the separation by distributing all of the shares of Exelis common stock on a pro rata basis to the holders of ITT common stock. We refer to this pro rata distribution as the “distribution” and we refer to the separation, including the internal reorganization and distribution, as the “spin-off.” We expect that the spin-off will be tax-free to ITT shareholders for U.S. Federal income tax purposes. Each share of ITT common stock outstanding as of 5:00 p.m., New York time, on October 17, 2011, the record date for the distribution, will entitle the holder thereof to receive one share of Exelis common stock. The distribution of shares will be made in book-entry form. The distribution will be effective as of 12:01 a.m., New York time, on October 31, 2011. Immediately after the distribution becomes effective, we will be an independent, publicly traded company.
 
No vote or other action of ITT shareholders is required in connection with the spin-off. We are not asking you for a proxy and you should not send us a proxy. ITT shareholders will not be required to pay any consideration for the shares of Exelis common stock they receive in the spin-off, and they will not be required to surrender or exchange shares of their ITT common stock or take any other action in connection with the spin-off. Concurrently with the Exelis spin-off, ITT will spin-off its water-related businesses into a separate independent, publicly traded company to be called Xylem Inc. (“Xylem”). You are invited to also read the detailed information about Xylem in the accompanying Information Statement for Xylem.
 
All of the outstanding shares of Exelis common stock are currently owned by ITT. Accordingly, there is no current trading market for Exelis common stock. We expect, however, that a limited trading market for Exelis common stock, commonly known as a “when-issued” trading market, will develop at least two trading days prior to the record date for the distribution, and we expect “regular-way” trading of Exelis common stock will begin the first trading day after the distribution date. We intend to list Exelis common stock on the New York Stock Exchange under the ticker symbol “XLS”.
 
In reviewing this Information Statement, you should carefully consider the matters described in “Risk Factors” beginning on page 17 of this Information Statement.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this Information Statement is truthful or complete. Any representation to the contrary is a criminal offense.
 
This Information Statement is not an offer to sell, or a solicitation of an offer to buy, any securities.
 
The date of this Information Statement is          , 2011.
 
This Information Statement was first mailed to ITT shareholders on or about          , 2011.


 

 
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SUMMARY
 
This summary highlights information contained in this Information Statement and provides an overview of our company, our separation from ITT and the distribution of Exelis common stock by ITT to its shareholders. For a more complete understanding of our business and the spin-off, you should read the entire Information Statement carefully, particularly the discussion set forth under “Risk Factors” and our audited historical combined financial statements, unaudited interim historical condensed combined financial statements, our unaudited pro forma condensed combined financial statements and the respective notes to those statements appearing in this Information Statement.
 
Except as otherwise indicated or unless the context otherwise requires, “Exelis,” “we,” “us” and “our” refer to Exelis Inc. and its subsidiaries after giving effect to the internal reorganization preceding the distribution described in this Information Statement. Except as otherwise indicated or unless the context otherwise requires, the information included in this Information Statement assumes the completion of the internal reorganization preceding the distribution.
 
Unless otherwise indicated, references in this Information Statement to fiscal years are to Exelis’s fiscal years ended December 31. Exelis’s 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.
 
Our Company
 
We are a leader in Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) related products and systems and information and technical services, which we supply to military, government and commercial customers in the United States and globally. We provide mission-critical systems in the areas of integrated electronic warfare, sensing and surveillance, air traffic management, information and cyber-security, and networked communications. We also have growing positions in composite aerostructures, logistics and technical services. Our customers include the U.S. Army, Navy, Marines and Air Force, NASA, various U.S. civil, intelligence and security agencies, the Federal Aviation Administration, allied militaries and governments, and various commercial customers. For the year ended December 31, 2010 and the six months ended June 30, 2011, our revenue was $5.89 billion and $2.83 billion, respectively, and our income from continuing operations was $448 million and $161 million, respectively, and 73% of our 2010 sales were derived from the U.S. Department of Defense (DoD) and the U.S. Intelligence Community.
 
We operate in two segments: C4ISR Electronics and Systems, and Information and Technical Services. Our C4ISR Electronics and Systems segment provides communications, electronic warfare, imaging and image-processing, radar and sonar systems, space systems, and aerostructures for government and commercial customers around the world. Our Information and Technical Services segment provides a broad range of systems integration, network design and development, cyber, intelligence, operations, sustainment, advanced engineering, logistics, space launch and range-support solutions for a wide variety of U.S. military and government agency customers. We have successfully completed and integrated several acquisitions over the last five years, which have broadened our product and technology portfolio, expanded our customer base, and contributed to our growth.
 
We employ approximately 20,400 people on four continents. This includes an experienced management team with a proven ability to win new contracts, drive premier operating efficiency, and lead development of game-changing technologies and solutions.
 
Our Business Strategy and Core Strengths
 
We intend to create value by being an agile, efficient and reliable supplier of critical systems, components and services for our core U.S. Government customers as well as our growing allied international government


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and commercial customer base, particularly in the areas of C4ISR-related electronics, aerostructures, air traffic management, and secure, integrated data and voice networks. We view the following strategies as our fundamental means for value-creation:
 
Proactive portfolio management:  We take a proactive and disciplined approach to continuously shape our portfolio by aligning our businesses with enduring and growing customer needs. Our multifaceted defense portfolio has been well-positioned to support the critical needs of the DoD through a decade of heavy troop deployments and conflict. Hedging against the expectation of tighter defense budgets to come, we have steadily broadened our customer base over the last several years to include other U.S. Government agencies, allied international governments and commercial customers, with product and service offerings in areas of enduring and growing demand such as air traffic management, advanced imaging and global positioning systems, weather, composite structures, communications and electronics, and information technology. As set forth in the chart below, our end-user customers were approximately 27% non-DoD for the year ended December 31, 2010.
 
2010 Sales by End User
 
(PIE CHART)
 
While we intend to protect and expand our core positions as a leading prime system and service contractor and first-tier defense electronics supplier, we recognize that defense spending trends and priorities are subject to change and are likely to be different over the coming decade than they were in the last. To this end, we will undertake select divestitures and acquisitions that enhance our ability to deliver ever greater value to our shareholders.
 
Innovative solutions:  We focus on investing in next generation technologies and solutions that address vital customer priorities. We intend to sustain and cultivate our strong culture of innovation which embraces:
 
  •  World-leading technologies in integrated electronic warfare, night vision, networked information and communications, sensors and surveillance, image processing, air traffic management, and aerostructures.
 
  •  Creative approaches to rapidly fielding affordable solutions for critical customer needs, such as our “Global Network On the Move Active Distribution” (GNOMAD) solution for affordable vehicle-mounted tactical satellite communications, and our handheld Netted Iridium radios for secure, 24/7 beyond-line-of-sight voice and data communications, both provided to support urgent need requests from units deployed to Afghanistan; and our compact imaging systems mounted on Unmanned


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  Aerial Vehicles (UAVs) in support of the U.S. Air Force’s “Knight Owl” program, to perform persistent surveillance missions over wide geographical areas.
 
  •  Collaboration internally, across our diverse businesses, and teaming with expert partners to deliver “best-in-class” offerings on new business opportunities, such as our winning solution as the prime contractor for the Federal Aviation Administration’s (FAA) Automated Dependent Surveillance-Broadcast (ADS-B) system, currently being deployed to provide GPS-based positioning data for aircraft throughout the United States, and our role as a major subcontractor on the Global Positioning System — Advance Control Segment (GPS-OCX) project for the U.S. Air Force, where we are providing key components for navigation and system security.
 
Organic and geographic growth, while broadening our customer base:  We intend to grow market share, expand into adjacencies and continue to penetrate non-DoD customers where we can build on our domain expertise and extend our leadership positions. Our strong incumbent positions and large fielded base of night vision devices, radios, jammers, radars and other electronic equipment (much of it expected to remain in operation for decades) provide opportunities for future upgrades, modernization and sustainment contracts as the military services seek affordable alternatives to costly and unproven replacement programs in an effort to stretch procurement dollars in a tighter fiscal environment. We also intend to build on the growth we have achieved in international sales over the last two years. For the year ended December 31, 2010, international sales were $627 million and comprised approximately 11% of our total revenue. Our focus is on allied countries with enduring or growing defense needs or that seek modernization of their air traffic management infrastructures, particularly in the Middle East, the United Kingdom, India, Taiwan, Korea, Australia and Brazil. We will also focus on natural extensions of existing technologies into commercial markets, such as air traffic management data for commercial air carriers and composite structures for commercial fixed and rotary-wing aircraft.
 
Disciplined Financial Management:  We intend to continue to combine disciplined goal-setting, accountability for results, and our rigorous Integrated Management System, reinforced by our performance assessment and incentive programs, to align our organization around achieving our business objectives. Our strategies include a combination of organic growth, disciplined capital allocation, portfolio management, and premier operational excellence.
 
Leveraging our Core Strengths:  We have created a culture of “adaptive ingenuity” — combining premier operating efficiency, intimate knowledge of our customers’ needs, technical expertise and innovation. We believe that we are quicker and more nimble than our larger competitors, and better able to provide rapid and affordable solutions to our customers’ most pressing needs. We are also “platform-agnostic,” in that we provide essential systems and components on a wide variety of aircraft, ships, ground vehicles, unmanned systems, and satellites, so that our business prospects are not tied to the future of any single program. We see our diverse portfolio as an advantage in the current defense budget environment, as we have strong incumbent positions on many key programs, a robust pipeline of competitive opportunities, and, for the year ended December 31, 2010 and the six months ended June 30, 2011, no single program accounted for more than 7% of our revenue. Our core strengths are further explained below:
 
  •  Premier operating efficiency:  Our world-class Lean and Six Sigma programs are embedded in our culture and operating ethic. In addition, in 2010 we launched and completed a structural transformation that reduced the number of business units, layers of management, and facility footprint, while right-sizing our workforce to prepare for the reductions we expected in 2010 and 2011 in the volumes of some of our products, including Single Channel Ground and Airborne Radio System (SINCGARS) radios, Counter Radio-Controlled Improvised Explosive Device Electronic Warfare (CREW) jammers, and night vision goggle purchases from peak war-surge levels to normal volumes. We intend to continue to aggressively reduce costs, minimize overhead, increase productivity, and streamline our footprint where necessary to ensure optimum utilization of our production facilities.
 
  •  Customer relationships:  Understanding our customers’ needs is essential to winning and sustaining their trust and earning repeat business and, as such, we will continue our intense focus on the “Voice of


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  the Customer.” We believe that an innovative culture, domain expertise and an understanding of customer needs are essential to developing and delivering tailored customer solutions.
 
  •  Experienced team:  Our senior corporate team, value-center presidents, and business unit general managers have an average of 20 years experience in the aerospace and defense industry. Approximately 25% of our employees have engineering degrees and approximately 200 of our employees hold PhDs.
 
  •  Diverse portfolio and breadth of programs:  Our systems and components provide a wide array of mission-enabling technologies on defense and commercial platforms in the air, at sea, on the ground, and in space. For example, our systems (spanning electronics, antennas, and structural systems) are on the F-35 Joint Strike Fighter (JSF), F/A-18C/D/E/F, F-22, F-16, F-15E, F-14, EA-18, EA-6B, E-2C, B-1B, B-2, B-52, C-130, CH53K, C17, AV-8B, A-6F, P-8, AH-64, MQ-9 Reaper (UAV), and a variety of NATO aircraft including Tornado, Eurofighter and Gripen. Our composite aerostructures and antennas are widely used on commercial jets made by Boeing and Airbus, and Sikorsky commercial helicopters. At sea, our systems and technologies are essential to the Navy’s aircraft carriers, submarines and Littoral Combat Ships, as well as the Coast Guard’s Deepwater platforms. On the ground, we provide communications and electronic force protection systems for over 120 ground vehicle and weapon system types, including HMMWVs, MRAPs, M-ATVs, and various armored combat vehicles. Also, as the leading supplier of night vision goggles, we help pilots, ground troops and surface ship combatants to “own the night,” whether operating aboard the many platforms noted above or dismounted. In space, our positioning, navigation and meteorological systems are on board every GPS and weather satellite, and we are a leader in advanced optical systems for aerospace applications. In commercial aviation, we are the prime contractor for the FAA’s ADS-B contract, which will improve the safety, capacity and efficiency of aviation while accommodating future air traffic growth. We are also extending our reach within the commercial aviation market by leveraging the aviation data we collect through ADS-B into our next-generation airport operations management system called Symphony. We believe our diversified platform and program exposure, extending from deep space to undersea, is a core strength that mitigates risk to specific defense program cuts and creates multiple opportunities for growth.
 
Recent Developments
 
On September 20, 2011 we issued $650 million aggregate principal amount of senior notes. See “The Spin-off-Incurrence of Debt” and “Description of Material Indebtedness.”
 
Other Information
 
Exelis Inc. was incorporated in Indiana on May 4, 2011. Our principal executive offices are located at 1650 Tysons Boulevard, Suite 1700, McLean, Virginia, 22102. Our telephone number is (703) 790-6300.
 
The Spin-Off
 
Overview
 
On January 11, 2011, the Board of Directors of ITT Corporation (“ITT”) approved a plan to spin-off Exelis and Xylem from ITT, following which Exelis and Xylem will be independent, publicly traded companies.
 
Before our spin-off from ITT, we will enter into a Distribution Agreement and several other agreements with ITT and Xylem related to the spin-off. These agreements will govern the relationship between and among us, ITT and Xylem after completion of the spin-off and provide for the allocation between us and ITT and Xylem of various assets, liabilities, rights and obligations (including employee benefits, intellectual property, information technology, insurance and tax-related assets and liabilities). These agreements will also govern


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Exelis’s relationship with ITT and Xylem following the spin-off and will provide arrangements for benefits and compensation matters, tax matters, intellectual property matters, insurance matters and other specified liabilities, rights and obligations attributable to periods before and, in some cases, after the spin-off. These agreements will also include arrangements with respect to transitional services to be provided by any of ITT, Exelis or Xylem to any other of them. See “Certain Relationships and Related Party Transactions — Agreements with ITT and Xylem Related to the Spin-Off.” Additionally, at or before the spin-off, we expect to have indebtedness in an amount estimated at $890 million, which includes $650 million aggregate principal amount of notes issued by us on September 20, 2011 and $240 million of commercial paper and/or to be drawn under our credit facility. The net proceeds of the notes offerings have funded, and the proceeds from our commercial paper and/or our credit facility are expected to fund, a net cash transfer of approximately $701 million (the “Contribution”) to ITT, with the balance to be used for general corporate purposes.
 
The distribution of Exelis common stock as described in this Information Statement is subject to the satisfaction or waiver of certain conditions. In addition, ITT has the right not to complete the spin-off if, at any time prior to the distribution, the Board of Directors of ITT determines, in its sole discretion, that the spin-off is not in the best interests of ITT or its shareholders or other constituents, that a sale or other alternative is in the best interests of ITT or its shareholders or other constituents, or that it is not advisable at that time for Exelis to separate from ITT. See “The Spin-Off — Conditions to the Spin-Off.”
 
Questions and Answers About the Spin-Off
 
The following provides only a summary of the terms of the spin-off. For a more detailed description of the matters described below, see “The Spin-Off.”
 
Q: What is the spin-off?
 
A: The spin-off is the series of transactions by which Exelis will separate from ITT. To complete the spin-off, ITT will distribute to its shareholders all of the shares of Exelis common stock. We refer to this as the distribution. Following the spin-off, Exelis will be a separate company from ITT, and ITT will not retain any ownership interest in Exelis.
 
Q: What will I receive in the spin-off?
 
A: As a holder of ITT stock, you will retain your ITT shares and will receive one share of Exelis common stock for each share of ITT common stock you own as of the record date. You will also receive one share of common stock of Xylem Inc. in connection with the concurrent spin-off of that company. Your proportionate interest in ITT will not change as a result of the spin-off. See “The Spin-Off.”
 
Q: What is Exelis?
 
A: Exelis is a leader in Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) related products and systems and information and technical services, which we supply to military, government and commercial customers in the United States and globally. Exelis is currently a wholly owned subsidiary of ITT whose shares will be distributed to ITT shareholders if the spin-off is completed. After the spin-off is completed, Exelis will be a public company.
 
Q: Why is the separation of Exelis structured as a spin-off?
 
A: On January 11, 2011, the Board of Directors of ITT approved a plan to spin off its Defense and Information Solutions segment, which we refer to as ITT’s Defense business, and its water-related businesses, which we refer to as ITT’s Water business. ITT currently believes a spin-off is the most efficient way to accomplish a separation of the Defense business for various reasons, including: (i) a spin-off would be a tax-free distribution of Exelis common stock to shareholders; (ii) a spin-off offers a higher degree of certainty of completion in a timely manner, lessening disruption to current Defense business operations; and (iii) a spin-off provides greater assurance that decisions regarding Exelis’s capital structure support future financial stability. After consideration of strategic alternatives, including a sale, ITT believes that a tax-free spin-off will enhance the long-term value of both ITT and Exelis. See “The Spin-Off — Reasons for the Spin-Off.”


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Q: Can ITT decide to cancel the distribution of the Exelis common shares even if all the conditions have been met?
 
A: Yes. The distribution of Exelis common stock is subject to the satisfaction or waiver of certain conditions. See “The Spin-Off — Conditions to the Spin-Off.” ITT has the right not to complete the spin-off if, at any time prior to the distribution, the Board of Directors of ITT determines, in its sole discretion, that the spin-off is not in the best interests of ITT or its shareholders or other constituents, that a sale or other alternative is in the best interests of ITT or its shareholders or other constituents, or that it is not advisable at that time for Exelis to separate from ITT.
 
Q: What is being distributed in the spin-off?
 
A: Approximately 184 million shares of Exelis common stock will be distributed in the spin-off, based on the number of shares of ITT common stock expected to be outstanding as of October 17, 2011, the record date, and assuming a distribution ratio of one-to-one. The exact number of shares of Exelis common stock to be distributed will be calculated on the record date. The shares of Exelis common stock to be distributed by ITT will constitute all of the issued and outstanding shares of Exelis common stock immediately prior to the distribution. For more information on the shares being distributed in the spin-off, see “Description of Capital Stock — Common Stock.”
 
Q: How will options and stock held by Exelis employees be affected as a result of the spin-off?
 
A: At the time of the distribution, the exercise price of and number of shares subject to any outstanding option to purchase ITT stock, as well as the number of shares subject to any restricted stock right or other ITT equity award held by Exelis’s current and former employees on the distribution date, will be adjusted to reflect the value of the distribution such that the intrinsic value of such awards at the time of separation is held constant. In addition, existing performance criteria applicable to such awards will be modified appropriately to reflect the spin-off.
 
At the time of the distribution, the ITT 401(k) Plan will be transferred to Exelis, and, on and following such time, will be renamed the Exelis 401(k) Plan. Exelis’s current and former employees who hold accounts in the ITT 401(k) Plan as of immediately prior to the distribution date will remain participants in the renamed Exelis 401(k) Plan. On the distribution date, shares of Exelis common stock and shares of Xylem common stock, based on the distribution ratio for each share of ITT common stock held in such employee’s ITT stock fund account as of immediately prior to the distribution date, will be included in new Exelis and Xylem stock fund accounts under the Exelis 401(k) Plan. However, in conformity with the fiduciary responsibility requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”), remaining shares of ITT and Xylem common stock held in Exelis employees’ ITT and Xylem stock fund accounts following the distribution will be disposed of and allocated to another investment alternative available under the Exelis 401(k) Plan if and when directed by participants, and any such shares remaining at such time as will be determined in the sole discretion of the fiduciaries of the Exelis 401(k) Plan, will be automatically disposed of and the proceeds invested in another such investment alternative (but this will not prohibit diversified, collectively managed investment alternatives available under the Exelis 401(k) Plan from holding ITT or Xylem common stock or prohibit employees who use self-directed accounts in the Exelis 401(k) Plan from investing their accounts in ITT or Xylem common stock).
 
In addition, current and former ITT employees who hold shares of ITT common stock in the ITT 401(k) Plan as of immediately prior to the distribution date will receive shares of Exelis common stock and shares of Xylem common stock in the distribution and will have their accounts transferred to the newly created ITT 401(k) Plan as soon as practicable after the distribution date. Exelis shares and shares of Xylem common stock will be included in new, temporary stock funds under the newly created ITT 401(k) Plan. In conformity with the fiduciary responsibility requirements of ERISA, remaining shares of Exelis and Xylem common stock held in these temporary stock funds following the distribution will be disposed of and allocated to another investment alternative available under the newly created ITT 401(k) Plan when directed by participants, and any such shares remaining at such time as will be determined in the sole discretion of the fiduciaries of the newly created ITT 401(k) Plan, will be automatically disposed of and the proceeds


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invested in another such investment alternative (but this will not prohibit diversified, collectively managed investment alternatives available under the newly created ITT 401(k) Plan from holding our common stock or Xylem common stock or prohibit employees who use self-directed accounts in the newly created ITT 401(k) Plan from investing their accounts in our common stock or Xylem common stock).
 
Q: When is the record date for the distribution?
 
A: The record date will be 5:00 p.m., New York time, on October 17, 2011.
 
Q: When will the distribution occur?
 
A: The distribution date of the spin-off is October 31, 2011. Exelis expects that it will take the distribution agent, acting on behalf of ITT, up to two weeks after the distribution date to fully distribute the shares of Exelis common stock to ITT shareholders. The ability to trade Exelis shares will not be affected during that time.
 
Q: What do I have to do to participate in the spin-off?
 
A: Nothing. You are not required to take any action, although you are urged to read this entire document carefully. No shareholder approval of the distribution is required or sought. You are not being asked for a proxy. No action is required on your part to receive your shares of Exelis common stock. You will neither be required to pay anything for the new shares nor be required to surrender any shares of ITT common stock to participate in the spin-off.
 
Q: What are ITT’s reasons for the spin-off?
 
A: ITT’s Board of Directors has determined that the spin-off is in the best interests of ITT and its shareholders and other constituents because the spin-off will provide the following key benefits:
 
• Greater Strategic Focus of Financial Resources and Management’s Efforts.  ITT’s Defense business represents a discrete portion of ITT’s overall businesses. It has historically exhibited different financial and operating characteristics than ITT’s other businesses. The spin-off will allow us to better align management’s attention, compensation and resources to pursue opportunities in the defense information and technology market and to manage our cost structure more actively.
 
• Enhanced Customer Focus.  Both ITT and we believe that, as a unified, commonly managed, stand-alone defense technology and information solutions business, our management will be able to focus solely on the needs of our own customers, without dilution arising from a connection to a larger parent with diverse goals and incentives.
 
• Direct and Differentiated Access to Capital Resources.  After the spin-off, we will no longer need to compete with ITT’s other businesses for capital resources. As a long-cycle U.S. defense business with strong U.S. cash flow generation, our business has different financial and operating characteristics from ITT’s other businesses.
 
• Enhanced Investor Choices by Offering Investment Opportunities in Separate Entities.  After the spin-off, investors should be better able to evaluate our financial performance, as well as our strategy within the context of our markets, thereby enhancing the likelihood that we will achieve an appropriate market valuation. We believe that defense-focused investors will understand the duration of our long-term cycle.
 
• Improved Management Incentive Tools.  It is expected that we will use our equity to compensate current and future employees. In multi-business companies such as ITT, it is difficult to structure incentives that reward managers in a manner directly related to the performance of their respective business units. By granting equity linked to a specific business, equity compensation will be more in line with the financial results of the managers’ direct work product.
 
• Utilization of Stock as an Acquisition Currency.  Although we are not currently evaluating any acquisitions involving the use of our stock, the spin-off will enable us to use our stock as currency to pursue certain financial and strategic objectives, including tax-free merger transactions. In addition, future strategic transactions with similar businesses will be more easily facilitated through the use of our stand-alone stock as consideration.


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  ITT’s Board of Directors also considered a number of potentially negative factors in evaluating the spin-off, including costs relating to the separation and risks relating to the capital structure of ITT and us following the spin-off. Notwithstanding these costs and risks, however, ITT’s Board of Directors determined that the potential benefits of the spin-off outweighed these factors. See “Risk Factors — Risks Relating to the Spin-Off” and “The Spin-Off — Reasons for the Spin-Off.”
 
Q: What are the U.S. Federal income tax consequences of the spin-off?
 
A: The spin-off is conditioned on the receipt by ITT of a ruling (“IRS Ruling”) from the Internal Revenue Service (“IRS”) that, for U.S. Federal income tax purposes, the distribution, together with certain related transactions will be tax-free to ITT and ITT’s shareholders under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986 (the “Code”). In addition, the spin-off is conditioned on the receipt of an opinion of tax counsel as to the satisfaction of certain requirements necessary for the distribution, together with certain related transactions, to receive tax-free treatment under Sections 355 and 368(a)(1)(D) of the Code upon which the IRS will not rule. ITT expects to receive such opinion at the time of the consummation of the spin-off. Although ITT has no intention to do so, such conditions are solely for the benefit of ITT and may be waived by ITT in its sole discretion. The tax consequences of the distribution are described in more detail under “The Spin-Off — U.S. Federal Income Tax Consequences of the Spin-Off.”
 
Q: Will the Exelis common stock be listed on a stock exchange?
 
A: Yes. Although there is not currently a public market for Exelis common stock, before completion of the spin-off, Exelis will apply to list its common stock on the New York Stock Exchange (“NYSE”) under the symbol “XLS”. It is anticipated that trading of Exelis common stock will commence on a “when-issued” basis at least two trading days prior to the record date. When-issued trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. When-issued trades generally settle within four trading days after the distribution date. On the first trading day following the distribution date, any when-issued trading with respect to Exelis common stock will end and “regular-way” trading will begin. “Regular- way” trading refers to trading after a security has been issued and typically involves a transaction that settles on the third full trading day following the date of the transaction. See “Trading Market.”
 
Q: Will my shares of ITT common stock continue to trade?
 
A: Yes. ITT common stock will continue to be listed and trade on the NYSE under the symbol “ITT.”
 
Q: If I sell, on or before the distribution date, shares of ITT common stock that I held on the record date, am I still entitled to receive shares of Exelis common stock distributable with respect to the shares of ITT common stock I sold?
 
A: Beginning on or shortly before the record date and continuing through the distribution date for the spin-off, ITT’s common stock will begin to trade in two markets on the NYSE: a “regular-way” market and an “ex-distribution” market. If you hold shares of ITT common stock as of the record date for the distribution and choose to sell those shares in the regular-way market after the record date for the distribution and on or before the distribution date, you also will be selling the right to receive the shares of Exelis common stock in connection with the spin-off. However, if you hold shares of ITT common stock as of the record date for the distribution and choose to sell those shares in the ex-distribution market after the record date for the distribution and on or before the distribution date, you will still receive the shares of Exelis common stock in the spin-off.
 
Q: Will the spin-off affect the trading price of my ITT stock?
 
A: Yes, the trading price of shares of ITT common stock immediately following the distribution is expected to change because its trading price will no longer reflect the value of the Defense and Water businesses. However, we cannot provide you with any guarantees as to the price at which the ITT shares will trade following the spin-off. In addition, following the distribution, ITT will effect a 1-for-2 reverse stock split of ITT common stock. The reverse stock split, which will become effective after the market close on October 31, 2011, is also expected to impact the trading price of shares of ITT common stock.
 
Q: What indebtedness will Exelis have following the spin-off?


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A: It is anticipated that, prior to the completion of the spin-off, Exelis will have indebtedness in an amount estimated at $890 million, which includes $650 million aggregate principal amount of notes issued by us on September 20, 2011 and $240 million of commercial paper and/or to be drawn under our credit facility. The net proceeds of the notes offerings have funded, and the proceeds from our commercial paper and/or our credit facility are expected to fund, a cash transfer of approximately $701 million to ITT, with the balance to be used for general corporate purposes.
 
Q: What is the Contribution?
 
A: As part of the internal reorganization, we expect to fund a total net cash transfer of approximately $701 million to ITT, which is expected to repay outstanding ITT indebtedness. Immediately following the Contribution, we expect that we will have approximately $200 million in cash and cash equivalents and long-term indebtedness of approximately $890 million, which, together with the cash generated by our ongoing operations, we believe will provide us with sufficient liquidity and capital resources to meet our cash needs and allow us to finance our operations on acceptable terms and conditions. Xylem is also expected to have approximately $200 million in cash and cash equivalents and long-term indebtedness of approximately $1.2 billion, which, together with the cash generated by its ongoing operations, is expected to provide Xylem, which recently completed the acquisition of YSI Incorporated, with sufficient liquidity and capital resources to meet its cash needs and allow Xylem to finance its operations on acceptable terms and conditions. In addition, immediately following the Contribution, ITT is expected to have approximately $600 million in cash and cash equivalents and no long-term indebtedness, which, together with the cash generated by ITT’s ongoing operations, is expected to provide ITT, which will have a larger portion of net legacy liabilities, with sufficient liquidity to meet its cash needs and permit ITT to finance its operations on acceptable terms and conditions. Although we believe that the arrangements in place at the time of the distribution will permit us, Xylem and ITT to finance our and their operations on acceptable terms and conditions, our, Xylem’s and ITT’s access to, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors, including credit ratings or absence of a credit rating, the liquidity of the overall capital markets, and the current state of the economy.
 
Q: What will be the relationship between ITT and Exelis after the spin-off?
 
A: Following the spin-off, Exelis will be an independent, publicly traded company and ITT will have no continuing stock ownership interest in Exelis. Exelis will have entered into a Distribution Agreement with ITT and Xylem and will enter into several other agreements for the purpose of allocating between Exelis, Xylem and ITT various assets, liabilities, rights and obligations (including employee benefits, intellectual property, insurance and tax-related assets and liabilities). These agreements will also govern Exelis’s relationship with ITT and Xylem following the spin-off and will provide arrangements for benefits and compensation matters, tax matters, intellectual property matters, insurance matters and other specified liabilities, rights and obligations attributable to periods before and, in some cases, after the spin-off. These agreements will also include arrangements with respect to transitional services to be provided by one or more of ITT, Exelis or Xylem to any other of them. The Distribution Agreement will provide, in general, that Exelis will indemnify ITT and Xylem, as the case may be, against any and all liabilities arising out of Exelis’s business as constituted in connection with the spin-offs and any other liabilities and obligations assumed by Exelis, and that ITT and Xylem will indemnify Exelis against any and all liabilities arising out of the businesses of ITT or Xylem, as the case may be, as constituted in connection with the spin-offs and any other liabilities and obligations assumed by ITT or Xylem, respectively.
 
Q: What will Exelis’s dividend policy be after the spin-off?
 
A: Following the distribution, we expect that initially Exelis will pay a dividend, although the timing, declaration, amount and payment of future dividends to our shareholders fall within the discretion of our Board of Directors and will depend on many factors, including our financial condition, results of operations and capital requirements, industry practice and other business considerations that Exelis’s Board of Directors considers relevant from time to time. In addition, the terms of the agreements governing our new debt or debt that we may incur in the future may limit or prohibit the payments of dividends. See “Dividend Policy.”


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Q: What are the anti-takeover effects of the spin-off?
 
A: Some provisions of the amended and restated articles of incorporation of Exelis and the amended and restated by-laws of Exelis, Indiana law and possibly the agreements governing Exelis’s new debt, as each will be in effect immediately following the spin-off, may have the effect of making more difficult an acquisition of control of Exelis in a transaction not approved by Exelis’s Board of Directors. See “Description of Capital Stock— Provisions of Our Amended and Restated Articles of Incorporation and Amended and Restated By-Laws That Could Delay or Prevent a Change in Control.” In addition, under the Tax Matters Agreement, Exelis will agree not to enter into any transaction for a period of two years following the distribution involving an acquisition (including issuance) of Exelis common stock or any other transaction (or, to the extent Exelis has the right to prohibit it, to permit any such transaction) that could cause the distribution to be taxable to ITT. Exelis will also agree to indemnify ITT for any tax resulting from any such transaction. Generally, ITT will recognize a taxable gain on the distribution if there are one or more acquisitions (including issuances) of Exelis capital stock representing 50% or more of Exelis’s then-outstanding stock, measured by vote or value, and the acquisitions are deemed to be part of a plan or series of related transactions that include the distribution. Any such acquisition of Exelis common stock within two years before or after the distribution (with exceptions, including public trading by less-than-5% shareholders and certain compensatory stock issuances) generally will be presumed to be part of such a plan unless that presumption is rebutted. As a result, Exelis’s obligations may discourage, delay or prevent a change of control of Exelis.
 
Q: What are the risks associated with the spin-off?
 
A: There are a number of risks associated with the spin-off and ownership of Exelis common stock. These risks are discussed under “Risk Factors.”
 
Q: How will the spin-off affect Exelis’s relationship with its customers?
 
A: We believe we have well-established relationships with our principal customers. We believe the spin-off will enable us to better focus on those customers and to align our resources with their priorities. As we seek to enter into new contracts with our customers, we expect to continue to provide information to enable them to have ongoing confidence in our management, our workforce and our ability to perform, including our financial stability.
 
Q: Where can I get more information?
 
A If you have any questions relating to the mechanics of the distribution, you should contact the distribution agent, The Bank of New York Mellon, at:
 
ITT Corporation
c/o BNY Mellon Shareowner Services
P.O. Box 358015
Pittsburgh, PA 15252-8015
Phone: 800 254 2823
 
Before the spin-off, if you have any questions relating to the spin-off, you should contact ITT at:
 
ITT Corporation
Investor Relations
Phone: +1 914 641 2030
Email: Thomas.Scalera@itt.com
www.itt.com
 
After the spin-off, if you have any questions relating to Exelis, you should contact Exelis at:
 
Exelis Inc.
Investor Relations
Phone: +1 703 790 6376
Email: Katy.Herr@itt.com


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Summary of the Spin-Off
 
Distributing Company ITT Corporation, an Indiana corporation. After the distribution, ITT will not own any shares of Exelis common stock.
 
Distributed Company Exelis Inc., an Indiana corporation and a wholly owned subsidiary of ITT. After the spin-off, Exelis will be an independent, publicly traded company.
 
Distributed Securities All of the shares of Exelis common stock owned by ITT, which will be 100% of Exelis common stock issued and outstanding immediately prior to the distribution.
 
Record Date The record date for the distribution is 5:00 p.m., New York time, on October 17, 2011.
 
Distribution Date The distribution date is October 31, 2011.
 
Internal Reorganization As part of the spin-off, ITT will undergo an internal reorganization, which we refer to as the “internal reorganization,” that will, among other things and subject to limited exceptions:
 
• allocate and transfer to each of Exelis and Xylem and their respective subsidiaries, as applicable, those assets, and to allocate and assign responsibility for those liabilities, in respect of the activities of the applicable businesses of such entities; and
 
• allocate, transfer and assign, as applicable, those assets and liabilities in respect of other current and former businesses and activities of ITT and its current and former subsidiaries.
 
After completion of the spin-off:
 
• Exelis will own and operate ITT’s C4ISR electronics and systems, and informational and technical services businesses;
 
• Xylem will own and operate ITT’s water infrastructure and applied water businesses; and
 
• ITT will own and operate its industrial process, motion technologies, interconnect solutions and control technologies businesses.
 
See “The Spin-Off — Manner of Effecting the Spin-Off — Internal Reorganization.”
 
Incurrence of Debt It is anticipated that, at or prior to completion of the spin-off, Exelis will have indebtedness in an amount estimated at $890 million, which includes $650 million aggregate principal amount of notes issued by us on September 20, 2011 and $240 million of commercial paper and/or to be drawn under our credit facility. The net proceeds of the notes offerings have funded, and the proceeds from our commercial paper and/or our credit facility are expected to fund, a net cash transfer of approximately $701 million to ITT, with the balance to be used for general corporate purposes.
 
Distribution Ratio Each holder of ITT common stock will receive one share of Exelis common stock for each share of ITT common stock held on October 17, 2011.
 
The Distribution On the distribution date, ITT will release the shares of Exelis common stock to the distribution agent to distribute to ITT shareholders. The distribution of shares will be made in book-entry form, which means that no physical share certificates will be issued. It is


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expected that it will take the distribution agent up to two weeks to issue shares of Exelis common stock to you or to your bank or brokerage firm electronically on your behalf by way of direct registration in book-entry form. Trading of our shares will not be affected during that time. Following the spin-off, shareholders whose shares are held in book-entry form may request that their shares of Exelis common stock be transferred to a brokerage or other account at any time. You will not be required to make any payment, surrender or exchange your shares of ITT common stock, or take any other action to receive your shares of Exelis common stock.
 
Conditions to the Spin-Off Completion of the spin-off is subject to the satisfaction or waiver by ITT of the following conditions:
 
• our Registration Statement on Form 10, of which this Information Statement forms a part, shall have been declared effective by the Securities and Exchange Commission (the “SEC”), no stop order suspending the effectiveness thereof shall be in effect, no proceedings for such purpose shall be pending before or threatened by the SEC, and this Information Statement shall have been mailed to the ITT shareholders;
 
• Exelis common stock shall have been approved for listing on the NYSE, subject to official notice of distribution;
 
• ITT shall have obtained an opinion from its tax counsel, in form and substance satisfactory to ITT, as to the satisfaction of certain requirements necessary for the distribution, together with certain related transactions, to qualify as a reorganization under Sections 355 and 368(a)(1)(D) of the Code upon which the IRS will not rule;
 
• ITT shall have obtained a private letter ruling from the Internal Revenue Service, in form and substance satisfactory to ITT, and such ruling shall remain in effect as of the distribution date, to the effect, among other things, that the distribution, together with certain related transactions, will qualify as a reorganization under Sections 355 and 368(a)(1)(D) of the Code;
 
• the Board of Directors of ITT shall have obtained opinions from a nationally recognized valuation firm, in form and substance satisfactory to ITT, with respect to the capital adequacy and solvency of each of ITT, Exelis and Xylem;
 
• ITT shall have obtained all government approvals and other consents necessary to consummate the distribution;
 
• no order, injunction or decree issued by any governmental entity of competent jurisdiction or other legal restraint or prohibition preventing the consummation of all or any portion of the distribution shall be pending, threatened, issued or in effect, and no other event outside the control of ITT shall have occurred or failed to occur that prevents the consummation of all or any portion of the distribution;
 
• no other events or developments shall have occurred or failed to occur that, in the judgment of the Board of Directors of ITT,


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would result in the distribution having a material adverse effect on ITT or its shareholders;
 
• the financing transactions described in this Information Statement as having occurred prior to the distribution shall have been consummated on or prior to the distribution;
 
• the internal reorganization shall have been completed, except for such steps as ITT in its sole discretion shall have determined may be completed after the distribution date;
 
• ITT shall have taken all necessary action, in the judgment of the Board of Directors of ITT, to cause the Board of Directors of Exelis to consist of the individuals identified in this Information Statement as directors of Exelis;
 
• ITT shall have taken all necessary action, in the judgment of the Board of Directors of ITT, to cause the officers of Exelis to be the individuals identified as such in this Information Statement;
 
• ITT shall have caused all its employees and any employees of its subsidiaries (excluding any employees of any of Exelis and its subsidiaries after the internal reorganization (the “Exelis Group”)) to resign, effective as of the distribution date, from all positions as officers or directors of any member of the Exelis Group in which they serve, and Exelis shall have caused all its employees and any employees of its subsidiaries to resign, effective as of the distribution date, from all positions as officers or directors of any of ITT, Xylem or any of their respective subsidiaries after the internal reorganization, in which they serve;
 
• all necessary actions shall have been taken to adopt the form of amended and restated articles of incorporation and amended and restated by-laws filed by Exelis with the SEC as exhibits to the Registration Statement on Form 10, of which this Information Statement forms a part;
 
• in the event the distribution is for any reason postponed more than one hundred twenty days after the date of the Distribution Agreement, the Board of Directors of ITT shall have redetermined, as of such postponed distribution date, that the distribution satisfies the requirements of Indiana Business Corporation Law governing distributions;
 
• the Board of Directors of ITT shall have approved the distribution, which approval may be given or withheld at its absolute and sole discretion; and
 
• each of the Distribution Agreement, the Tax Matters Agreement, the Benefits and Compensation Matters Agreement, the Intellectual Property License Agreements, the Master Transition Services Agreement and the other ancillary agreements shall have been executed by each party.
 
Completion of the spin-off of Xylem will be subject to similar conditions as those listed above. The fulfillment of the foregoing conditions will not create any obligation on ITT’s part to effect the spin-off. We are not aware of any material federal, foreign or state


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regulatory requirements that must be complied with or any material approvals that must be obtained, other than compliance with SEC rules and regulations, the receipt of a private letter ruling from the Internal Revenue Service, approval for listing on the NYSE and the declaration of effectiveness of the Registration Statement on Form 10 by the SEC, in connection with the distribution. ITT has the right not to complete the spin-off if, at any time prior to the distribution, the Board of Directors of ITT determines, in its sole discretion, that the spin-off is not then in the best interests of ITT or its shareholders or other constituents, that a sale or other alternative is in the best interests of ITT or its shareholders or other constituents, or that it is not advisable for Exelis to separate from ITT at that time. For more information, see “The Spin-Off — Conditions to the Spin-Off.”
 
Trading Market and Symbol We intend to file an application to list Exelis common stock on the NYSE under the ticker symbol “XLS”. We anticipate that, at least two trading days prior to the record date, trading of shares of Exelis common stock will begin on a “when-issued” basis and will continue up to and including the distribution date, and we expect “regular-way” trading of Exelis common stock will begin the first trading day after the distribution date. We also anticipate that, at least two trading days prior to the record date, there will be two markets in ITT common stock: a regular-way market on which shares of ITT common stock will trade with an entitlement for the purchaser of ITT common stock to shares of Exelis common stock to be distributed pursuant to the distribution, and an “ex-distribution” market on which shares of ITT common stock will trade without an entitlement for the purchaser of ITT common stock to shares of Exelis common stock. For more information, see “Trading Market.”
 
Tax Consequences As a condition to the spin-off, ITT will have received an IRS Ruling stating that ITT and ITT’s shareholders will not recognize any taxable income, gain or loss for U.S. Federal income tax purposes as a result of the spin-off. In addition, the spin-off is conditioned on the receipt of an opinion of tax counsel as to the satisfaction of certain requirements necessary for the spin-off to receive tax-free treatment upon which the IRS will not rule. See “The Spin-Off — U.S. Federal Income Tax Consequences of the Spin-Off.”
 
Each shareholder is urged to consult his, her or its tax advisor as to the specific tax consequences of the spin-off to such shareholder, including the effect of any state, local or non-U.S. tax laws and of changes in applicable tax laws.
 
Relationship with ITT after the Spin-Off We will enter into a Distribution Agreement and other agreements with ITT and Xylem related to the spin-off. These agreements will govern the relationship between us, Xylem and ITT after completion of the spin-off and provide for the allocation between us, Xylem and ITT of various assets, liabilities, rights and obligations (including employee benefits, intellectual property, insurance and tax-related assets and liabilities). The Distribution Agreement will provide for the allocation of assets and liabilities among ITT, Xylem and Exelis and will establish the rights and obligations


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between and among the parties following the distribution. We intend to enter into one or more Transition Services Agreements with ITT and Xylem pursuant to which certain services will be provided on an interim basis following the distribution. We also intend to enter into a Benefits and Compensation Matters Agreement that will set forth the agreements between us, Xylem and ITT concerning certain employee compensation and benefit matters. Further, we intend to enter into a Tax Matters Agreement with Xylem and ITT regarding the sharing of taxes incurred before and after completion of the spin-off, certain indemnification rights with respect to tax matters and certain restrictions to preserve the tax-free status of the spin-off. In addition, to facilitate the ongoing use of various intellectual property, we intend to enter into a Technology License Agreement that will provide for certain reciprocal licensing arrangements with ITT and Xylem and a trademark license agreement with ITT to use the ITT name for a transitional period. We describe these arrangements in greater detail under “Certain Relationships and Related Party Transactions — Agreements with ITT and Xylem Related to the Spin-Off,” and describe some of the risks of these arrangements under “Risk Factors — Risks Relating to the Spin-Off.”
 
Dividend Policy Following the distribution, we expect that initially Exelis will pay a dividend, although the timing, declaration, amount and payment of future dividends to our shareholders fall within the discretion of our Board of Directors and will depend on many factors, including our financial condition, results of operations and capital requirements, as well as applicable law, regulatory constraints, industry practice and other business considerations that Exelis’s Board of Directors considers relevant. In addition, the terms of the agreements governing our new debt or debt that we may incur in the future may limit or prohibit the payments of dividends. See “Dividend Policy.”
 
Transfer Agent The Bank of New York Mellon
 
Risk Factors We face both general and specific risks and uncertainties relating to our business, our relationship with ITT and Xylem and our being an independent, publicly traded company. We also are subject to risks relating to the spin-off. You should carefully read the risk factors set forth in the section entitled “Risk Factors” in this Information Statement.


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Summary Historical Combined Financial Data and Unaudited Pro Forma Condensed Combined Financial Data
 
The following table presents the summary historical combined financial data for Exelis. The combined statement of operations data for each of the years in the three-year period ended December 31, 2010 and the combined balance sheet data as of December 31, 2010 and 2009 set forth below are derived from Exelis’s audited combined financial statements included in this Information Statement. The condensed combined financial data for the six months ended June 30, 2011 and 2010 and the Condensed Combined balance sheet data as of June 30, 2011 are derived from Exelis’s unaudited condensed combined financial statements included in this Information Statement. The combined balance sheet data as of June 30, 2010 and December 31, 2008 are derived from Exelis’s unaudited combined financial statements that are not included in this Information Statement. The unaudited combined financial statements have been prepared on the same basis as the audited combined financial statements and, in the opinion of our management, include all adjustments necessary for a fair presentation of the information set forth herein.
 
The summary unaudited pro forma condensed combined financial data for the six months ended June 30, 2011 and the year ended December 31, 2010 have been prepared to reflect the spin-off, including: (i) the distribution of Exelis common stock by ITT to its shareholders; (ii) the incurrence of indebtedness in an amount estimated at $890 million and the making of the $701 million Contribution; and (iii) the impact of the transactions contemplated by the Tax Matters Agreement. The unaudited pro forma condensed combined income statement data presented for the six months ended June 30, 2011 and the year ended December 31, 2010 assumes the spin-off occurred on January 1, 2010. The unaudited pro forma condensed combined balance sheet data assumes the spin-off occurred on June 30, 2011. The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information and we believe such assumptions are reasonable under the circumstances.
 
The unaudited pro forma condensed combined financial statements are not necessarily indicative of our results of operations or financial condition had the distribution and our anticipated post-spin-off capital structure been completed on the dates assumed. Also, they may not reflect the results of operations or financial condition that would have resulted had we been operating as an independent, publicly traded company during such periods. In addition, they are not necessarily indicative of our future results of operations or financial condition.
 
You should read this summary financial data together with “Unaudited Pro Forma Condensed Combined Financial Statements,” “Capitalization,” “Selected Historical Condensed Combined Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the combined and condensed combined financial statements and accompanying notes included in this Information Statement.
 
                                                         
    As of and for
  As of and for
    Six Months Ended June 30   Year Ended December 31
    Pro Forma
          Pro Forma
           
    2011   2011   2010   2010   2010   2009   2008
    (In millions)
 
Results of Operations
                                                       
Revenues
  $ 2,829     $ 2,829     $ 2,894     $ 5,891     $ 5,891     $ 6,061     $ 6,072  
Operating income
    249       235       309       689       689       702       650  
Operating Margin
    8.8 %     8.3 %     10.7 %     11.7 %     11.7 %     11.6 %     10.7 %
Income from continuing operations
    158       161       199       424       448       459       414  
Net income(a)
    158       161       205       563       587       469       421  
Financial Position
                                                       
Total assets
    4,861       4,403       4,467               4,295       4,498       4,530  
Total debt
    890                                                  
 
 
(a) Net income for the six months ended June 30, 2010 and the years ended December 31, 2010, 2009 and 2008 includes $6, $139, $10 and $7 of income from discontinued operations, net of taxes. During 2010, we sold CAS, Inc., a component of our Information and Technical Services segment.


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RISK FACTORS
 
You should carefully consider each of the following risks, which we believe are the principal risks that we face and of which we are currently aware, and all of the other information in this Information Statement. Some of the risks described below relate to our business, while others relate to the spin-off. Other risks relate principally to the securities markets and ownership of our common stock.
 
Should any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially and adversely affected, the trading price of our common stock could decline, and you could lose all or part of your investment.
 
Risks Relating to Our Business
 
We face the following risks in connection with the general conditions and trends of the industry in which we operate:
 
We are dependent on the U.S. Government for a substantial portion of our revenue and the outlook for U.S. Government spending is uncertain.
 
Approximately 86% of our 2010 revenues were derived from products and services ultimately sold to the U.S. Government, including the Department of Defense (DoD). All of these sales are directly affected by, among other things, the annual federal budget, appropriations made to defense programs, and spending levels. DoD budget and priorities impacting the programs can be affected by external threats to our national security, funding for ongoing operations in Iraq and Afghanistan, future priorities of the current presidential administration, and the overall health of the U.S. and world economies. For example, the Obama Administration recently requested a $400 billion reduction in the U.S. defense budget over the next 12 years that will require the Pentagon to undertake a comprehensive review of military missions and capabilities, which could result in the reduction or cancellation of some military programs. Additionally, many Congressional members are pursuing deficit-reduction initiatives that will also create additional scrutiny on U.S. defense budgets. Our future results may be directly impacted by these actions since it has direct bearing on our ability to receive awards under new and on-going defense programs, as well as other U.S. Government programs. Our ability to develop and market products and services under these programs, as well as the variability of timing and size of certain key orders will also be affected. Since many of our government contracts are fixed-price, increased costs which cannot be justified as an increase to the contract value exposes the risk of reduced profitability and the potential loss of future business. In addition, numerous contracts are subject to security and facility clearances, as well as export licenses, which, if withdrawn, restricted or made unavailable, would adversely affect our business. Changes in U.S. Government contracting regulations, and related governmental investigations could increase our costs of regulatory compliance and could have a negative effect on our brand name and on our ability to win new business. The risk of tighter defense budgets has not had a material impact on our current operations. The proposed cuts are future oriented and the budget passed by the U.S. Congress for the 2011 fiscal year did not materially impact our current operations.
 
The Budget Control Act of 2011, passed by the U.S. Congress and signed into law on August 2, 2011, includes provisions which, if fully enacted, could materially reduce DoD spending over ten years compared to previous spending projections. Although details have yet to be provided on where “security” category savings will be found from the Budget Control Act of 2011, or what portion of these savings will be required from DoD, we expect increased uncertainty and lower top-line DoD spending over the next several years. We expect the majority of cuts to be reserved for the latter half of the ten-year period over which the cuts are expected to be made. The cuts may include force structure reductions as well as investment account (that is, procurement and research and development) savings. These reductions in spending may have a material impact on our business.
 
The termination of government contracts may adversely affect our business.
 
Our financial performance is dependent on our performance under our U.S. Government contracts. The U.S. Government, and other governments, may terminate any of our government contracts at their convenience,


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as well as for default, based on our failure to meet specified performance measurements. If any of our government contracts were to be terminated for convenience, we generally would be entitled to receive payment for work completed and allowable termination or cancellation costs. If any of our government contracts were to be terminated for default, generally the U.S. Government would pay only for the work that has been accepted and can require us to pay the difference between the original contract price and the cost to re-procure the contract items, net of the work accepted from the original contract. The U.S. Government can also hold us liable for damages resulting from the default. The termination of any of our government contracts, whether for convenience or default, may adversely affect our current programs and may reduce our revenue, earnings or cash flows.
 
As a U.S. Government contractor, we are subject to a number of procurement regulations and could be adversely affected by changes in regulations or any negative findings from a U.S. Government audit or investigation.
 
U.S. Government contractors must comply with many significant procurement regulations and other requirements. These regulations and requirements, although customary in government contracts, increase our performance and compliance costs. If any such regulations or procurement requirements change, our costs of complying with them could increase and reduce our margins.
 
We operate in a highly regulated environment and are routinely audited and reviewed by the U.S. Government and its agencies such as the Defense Contract Audit Agency (DCAA) and Defense Contract Management Agency (DCMA). These agencies review our performance under our contracts, our cost structure and our compliance with applicable laws, regulations and standards, as well as the adequacy of, and our compliance with, our internal control systems and policies. Systems that are subject to review include, but are not limited to, our accounting systems, purchasing systems, billing systems, property management and control systems, cost estimating systems, compensation systems and management information systems. Any costs found to be unallowable or improperly allocated to a specific contract will not be reimbursed or must be refunded if already reimbursed. If an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspension, or prohibition from doing business with the U.S. Government. Whether or not illegal activities are alleged, the U.S. Government also has the ability to decrease or withhold certain payments when it deems systems subject to its review to be inadequate or if it believes it is in the government’s best interests during the pendency of a dispute. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.
 
The U.S. Government, from time to time, recommends to its contractors that certain contract prices be reduced, or that costs allocated to certain contracts be disallowed. These recommendations can involve substantial amounts. In the past, as a result of such audits and other investigations and inquiries, we have on occasion made adjustments to our contract prices and the costs allocated to our government contracts.
 
We are also, from time to time, subject to U.S. Government investigations relating to our operations, and we are subject to or expected to perform in compliance with a vast array of federal laws, including but not limited to the Truth in Negotiations Act, the False Claims Act, the Procurement Integrity Act, Cost Accounting Standards, the International Traffic in Arms Regulations promulgated under the Arms Export Control Act, the Close the Contractor Fraud Loophole Act and the Foreign Corrupt Practices Act. If we are convicted or otherwise found to have violated the law, or are found not to have acted responsibly as defined by the law, we may be subject to reductions of the value of contracts, contract modifications or termination and the assessment of penalties and fines, compensatory or treble damages, which could have a material adverse effect on our financial position, results of operations, or cash flows. Such findings or convictions could also result in suspension or debarment from government contracting. Given our dependence on government contracting, suspension or debarment could have a material adverse effect on our financial position, results of operations, or cash flows.


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The Department of Defense has announced plans for significant changes to its business practices that could have a material effect on its overall procurement process and adversely impact our current programs and potential new awards.
 
In September 2010, the DoD announced various initiatives designed to gain efficiencies, refocus priorities and enhance business practices used by the DoD, including those used to procure goods and services from defense contractors. These initiatives are organized into five major areas: affordability and cost growth; productivity and innovation; competition; services acquisition; and processes and bureaucracy. These new initiatives are expected to have a significant impact on the contracting environment in which we do business with our DoD customers, and they could have a significant impact on current programs as well as new DoD business opportunities. In his January 6, 2011, announcement regarding future plans, the Secretary of Defense employed some of these initiatives to reduce costs and free up resources for reinvestment. For example, he discussed using multi-year procurement of Navy aircraft, information technology infrastructure streamlining, reductions in outsourcing, consolidation of operating centers and staffs, improving depot and supply chain processes, downsizing intelligence organizations, and eliminating some elements of the DoD’s bureaucracy. Changes to the DoD acquisition system and contracting models could affect whether or not and how we pursue certain opportunities and the terms under which we are able to do so. These initiatives are still fairly new, and the full impact to our business remains uncertain and subject to the manner in which the DoD implements them.
 
Competition within our markets and an increase in bid protests may reduce our revenues and market share.
 
We operate in highly competitive markets, and our competitors may have more extensive or more specialized engineering, manufacturing and marketing capabilities than we do in some areas. We anticipate higher competition in some of our core markets as a result of the reduction in budgets for many U.S. Government agencies and fewer new program starts. In addition, as discussed in more detail above, projected U.S. defense spending levels for periods beyond the near-term are uncertain and difficult to predict. Changes in U.S. defense spending may limit certain future market opportunities. We are also facing increasing competition in our domestic and international markets from foreign and multinational firms. Additionally, some customers, including the DoD, may turn to commercial contractors, rather than traditional defense contractors, for information technology and other support work. If we are unable to continue to compete successfully against our current or future competitors, we may experience declines in revenues and market share which could negatively impact our financial position, results of operations, or cash flows.
 
The competitive environment is also affected by bid protests from unsuccessful bidders on new program awards. Bid protests could result in the award decision being overturned, requiring a re-bid of the contract. Even where a bid protest does not result in a re-bid, the resolution typically extends the time until the contract activity can begin, which may reduce our earnings in the period in which the contract would otherwise have commenced.
 
Our international business exposes us to additional risks.
 
Our international business constitutes approximately 11% of total revenues. We are subject to numerous U.S. and foreign laws and regulations, including, without limitation, regulations relating to import-export control, technology transfer restrictions, repatriation of earnings, exchange controls, the Foreign Corrupt Practices Act and the anti-boycott provisions of the U.S. Export Administration Act. Failure by us or our sales representatives or consultants to comply with these laws and regulations could result in administrative, civil, or criminal liabilities and could, in the extreme case, result in suspension or debarment from government contracts or suspension of our export privileges, which could have a material adverse effect on us. Changes in regulation or political environment may affect our ability to conduct business in foreign markets, including investment, procurement and repatriation of earnings.
 
The services and products we provide internationally, including through the use of subcontractors, are sometimes in countries with unstable governments, in areas of military conflict or at military installations. This increases the risk of an incident resulting in damage or destruction to our products or resulting in injury or


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loss of life to our employees, subcontractors or other third parties. We maintain insurance to mitigate risk and potential liabilities related to our international operations, but our insurance coverage may not be adequate to cover these claims and liabilities and we may be forced to bear substantial costs arising from those claims. (See additional discussion of possible inadequacy of our insurance coverage below). In addition, any accidents or incidents that occur in connection with our international operations could result in negative publicity for the company, which may adversely affect our reputation and make it more difficult for us to compete for future contracts or result in the loss of existing and future contracts. The impact of these factors is difficult to predict, but any one or more of them could adversely affect our financial position, results of operations, or cash flows.
 
Our future success depends, in part, on our ability to develop new products and new technologies and maintain technologies, facilities, equipment and a qualified workforce to meet the needs of current and future customers.
 
The markets in which we operate are characterized by rapidly changing technologies. The product, program and service needs of our customers change and evolve regularly. Accordingly, our success in the competitive defense industry depends upon our ability to develop and market our products and services, as well as our ability to provide the people, technologies, facilities, equipment and financial capacity needed to deliver those products and services with maximum efficiency. If we fail to maintain our competitive position, we could lose a significant amount of future business to our competitors, which would have a material adverse effect on our ability to generate favorable financial results and maintain market share.
 
Operating results are heavily dependent upon our ability to attract and retain sufficient personnel with requisite skills and/or security clearances. If qualified personnel become scarce, we could experience higher labor, recruiting or training costs in order to attract and retain such employees or could experience difficulty in performing under our contracts if the needs for such employees are unmet.
 
Many of our contracts contain performance obligations that require innovative design capabilities, are technologically complex, require state-of-the-art manufacturing expertise or are dependent upon factors not wholly within our control. Failure to meet these obligations could adversely affect our profitability and future prospects.
 
We design, develop and manufacture technologically advanced and innovative products and services applied by our customers in a variety of environments. Problems and delays in development or delivery as a result of issues with respect to design, technology, licensing and patent rights, labor, learning curve assumptions or materials and components could prevent us from achieving contractual requirements.
 
In addition, our products cannot be tested and proven in all situations and are otherwise subject to unforeseen problems. Examples of unforeseen problems that could negatively affect revenue and profitability include loss on launch of spacecraft, premature failure of products that cannot be accessed for repair or replacement, problems with quality and workmanship, country of origin, delivery of subcontractor components or services and unplanned degradation of product performance. These failures could result, either directly or indirectly, in loss of life or property. Among the factors that may affect revenue and profits could be unforeseen costs and expenses not covered by insurance or indemnification from the customer, diversion of management focus in responding to unforeseen problems, loss of follow-on work, and, in the case of certain contracts, repayment to the government customer of contract cost and fee payments we previously received.
 
Misconduct of our employees, subcontractors, agents and business partners could cause us to lose customers or our ability to obtain new contracts.
 
Misconduct, fraud or other improper activities by our employees, subcontractors, agents or business partners could have a significant adverse impact on our business and reputation. Such misconduct could include the failure to comply with federal, state or local government procurement regulations, regulations regarding the protection of classified information, legislation regarding the pricing of labor and other costs in government contracts, laws and regulations relating to environmental matters, bribery of foreign government officials, import-export control, lobbying or similar activities, and any other applicable laws or regulations.


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Misconduct involving data security lapses resulting in the compromise of personal information or the improper use of our customer’s sensitive or classified information could result in remediation costs, regulatory sanctions against us and serious harm to our reputation. Other examples of potential misconduct include falsifying time or other records and violations of the Anti-Kickback Act. Although we have implemented policies, procedures and controls to prevent and detect these activities, these precautions may not prevent all misconduct and as a result, we could face unknown risks or losses. Our failure to comply with applicable laws or regulations or misconduct by any of our employees, subcontractors, agents or business partners could subject us to fines and penalties, loss of security clearance, loss of current and future customer contracts and suspension or debarment from contracting with federal, state or local government agencies, any of which would adversely affect our business, our reputation and our future results.
 
We use estimates in accounting for many of our programs and changes in our estimates could adversely affect our future financial results.
 
Accounting for construction and production type contracts requires judgment relative to assessing risks, including risks associated with customer directed delays and reductions in scheduled deliveries, unfavorable resolutions of claims and contractual matters, judgments associated with estimating contract revenues and costs, and assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total revenues and cost at completion is complicated and subject to many variables. For example, we must make assumptions regarding the length of time to complete the contract because costs also include expected increases in wages and prices for materials; consider whether the intent of entering into multiple contracts was effectively to enter into a single project in order to determine whether such contracts should be combined or segmented; consider incentives or penalties related to performance on contracts in estimating sales and profit rates, and record them when there is sufficient information for us to assess anticipated performance; and use estimates of award fees in estimating sales and profit rates based on actual and anticipated awards. Because of the significance of the judgments and estimation processes involved in accounting for construction and production type contracts, materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may adversely affect our future results of operations and financial condition.
 
The level of returns on postretirement benefit plan assets, changes in interest rates and other factors could affect our earnings, cash flows, and financial position in future periods.
 
A substantial portion of Exelis’s current and retired employee population is covered by pension and other employee-related defined benefit plans (collectively, postretirement benefit plans). We may experience significant fluctuations in costs related to postretirement benefit plans as a result of macro-economic factors, such as interest rates, that are beyond our control. The cost of our postretirement plans is incurred over long periods of time and involves various factors and uncertainties during those periods which can be volatile and unpredictable, including the rates of return on postretirement benefit plan assets, discount rates used to calculate liabilities and expenses, rates of future compensation increases, and trends for future medical costs. Management develops each assumption using relevant plan and Company experience and expectations in conjunction with market-related data. Exelis’s postretirement benefit plans were underfunded by $187 million at December 31, 2010. Our financial position and results of operations could be materially affected by significant changes in key economic indicators, financial market volatility, future legislation and other governmental regulatory actions.
 
We make contributions to fund our postretirement benefit plans when considered necessary or advantageous to do so. The macro-economic factors discussed above, including the return on postretirement benefit plan assets and the minimum funding requirements established by local government funding or taxing authorities, or established by other agreement, may influence future funding requirements. A significant decline in the fair value of our plan assets, or other adverse changes to our overall pension and other employee-related benefit plans could require us to make significant funding contributions and affect cash flows in future periods.


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U.S. Government Cost Accounting Standards govern the extent to which postretirement costs and plan contributions are allocable to and recoverable under contracts with the U.S. Government. As a result, we have sought and expect to continue to seek reimbursement from the DoD for a portion of our postretirement costs and plan contributions.
 
On May 10, 2010, the U.S. Government CAS Board published a Notice of Proposed Rulemaking (NPRM) that, if adopted, would provide a framework to partially harmonize the CAS rules with the Pension Protection Act of 2006 (PPA) funding requirements. The NPRM would harmonize by partially mitigating the mismatch between CAS costs and PPA-amended ERISA minimum funding requirements. The NPRM results in an acceleration of allowable CAS pension costs over the next five years as compared with our current CAS pension costs. Until the final rule is published, and to the extent that the final rule does not completely eliminate mismatches between ERISA funding requirements and CAS pension costs, government contractors maintaining defined benefit pension plans will continue to experience a timing mismatch between required contributions and pension expenses recoverable under CAS. The CAS Board is expected to issue a final rule prior to year-end 2011. Depending on the effective date, the final rule will likely apply to our contracts starting in 2012. We anticipate that government contractors will be entitled to an equitable adjustment for any additional CAS contract costs resulting from the final rule.
 
Contract cost growth on fixed-price and other contracts that cannot be justified as an increase in contract value due from customers exposes us to reduced profitability and the potential loss of future business.
 
Our operating income is adversely affected when we incur certain contract costs or certain increases in contract costs that cannot be billed to customers. This cost growth can occur if estimates to complete increase due to technical challenges, manufacturing difficulties or delays, or workforce-related issues, or if initial estimates used for calculating the contract cost were incorrect. The cost estimation process requires significant judgment and expertise. Reasons for cost growth may include unavailability or reduced productivity of labor, the nature and complexity of the work to be performed, the timelines and availability of materials, major subcontractor performance and quality of their products, the effect of any delays in performance, availability and timing of funding from the customer, natural disasters and the inability to recover any claims included in the estimates to complete. A significant change in cost estimates on one or more programs could have a material adverse effect on our combined financial position, results of operations or cash flows.
 
Most of our contracts are firm fixed-price contracts or flexibly priced contracts. Our risk varies with the type of contract. Flexibly priced contracts include both cost-type and fixed-price incentive contracts. Due to their nature, firm fixed-price contracts inherently have more risk than flexibly priced contracts. Approximately 52% of our annual revenues are derived from firm fixed-price contracts. We typically enter into firm fixed-price contracts where costs can be reasonably estimated based on experience. In addition, our contracts contain provisions relating to cost controls and audit rights. If the terms specified in our contracts are not met, then profitability may be reduced. Fixed-price development work comprises a small portion of our firm fixed-price contracts and inherently has more uncertainty as to future events than production contracts and therefore more variability in estimates of the costs to complete the development stage. As work progresses through the development stage into production, the risks associated with estimating the total costs of the contract are generally reduced. In addition, successful performance of firm fixed-price development contracts that include production units is subject to our ability to control cost growth in meeting production specifications and delivery rates. While management uses its best judgment to estimate costs associated with fixed-price development contracts, future events could result in either upward or downward adjustments to those estimates.
 
Under a cost-type contract the allowable costs incurred by the contractor are also subject to reimbursement plus a fee that represents profit. We enter into cost-type contracts for development programs with complex design and technical challenges. These cost-type programs typically have award or incentive fees that are subject to uncertainty and may be earned over extended periods. In these cases the associated financial risks are primarily in lower profit rates or program cancellation if cost, schedule, or technical performance issues arise.


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Our earnings and margins may vary based on the mix of our contracts and programs, our performance, and our ability to control costs.
 
Our earnings and margins may vary materially depending on the types and timing of long-term government contracts undertaken, the nature of the products produced or services performed under those contracts, the costs incurred in performing the work, the achievement of other performance objectives, and the stage of performance at which the right to receive fees is finally determined (particularly under award and incentive fee contracts). Changes in procurement policy favoring new, accelerated, or more incentive-based fee arrangements or different award fee criteria may affect the predictability of our profit rates.
 
Our backlog includes a variety of contract types which are intended to address changing risk and reward profiles as a program matures. Contract types include cost-reimbursable, fixed-price incentive, fixed-price, and time-and-materials contracts. Contracts for development programs that have complex design and technical challenges are typically cost-reimbursable. Under cost-reimbursable contracts, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance-based. In these cases, the associated financial risks primarily relate to a reduction in fees, and the program could be cancelled if cost, schedule, or technical performance issues arise.
 
Other contracts in backlog are for the transition from development to production (e.g., Low Rate Initial Production), which includes the challenge of starting and stabilizing a manufacturing production and test line while the final design is being validated. These generally are cost-reimbursable or fixed-price incentive contracts, although there is a current stated U.S. Government preference for fixed-price incentive contracts. Under a fixed-price incentive contract, the allowable costs incurred are eligible for reimbursement, but are subject to a cost-share limit which affects profitability. If our costs exceed the contract target cost or are not allowable under the applicable regulations, we may not be able to obtain reimbursement for all costs and may have our fees reduced or eliminated.
 
There are also contracts for production as well as operations and maintenance of the delivered products that have the challenge of achieving a stable production and delivery rate, while maintaining operability of the product after delivery. These contracts are mainly fixed-price, although some operations and maintenance contracts are time and materials-type. Under fixed-price contracts, we receive a fixed price despite the actual costs we incur. We have to absorb any costs in excess of the fixed price. Under time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and for certain expenses.
 
The failure to perform to customer expectations and contract requirements may result in reduced fees and affect our financial performance in that period. Under each type of contract, if we are unable to control costs, our operating results could be adversely affected, particularly if we are unable to justify an increase in contract value to our customers. Cost overruns or the failure to perform on existing programs also may adversely affect our ability to retain existing programs and win future contract awards.
 
Our earnings and margins depend, in part, on our ability to perform under contracts.
 
When agreeing to contractual terms, our management makes assumptions and projections about future conditions and events, many of which extend over long periods. These projections assess the productivity and availability of labor, the complexity of the work to be performed, the cost and availability of materials, the impact of delayed performance, and the timing of product deliveries. If there is a significant change in one or more of these circumstances or estimates, or if we face unanticipated contract costs, the profitability of one or more of these contracts may be adversely affected.
 
Our earnings and margins depend, in part, on subcontractor performance as well as raw material and component availability and pricing.
 
We rely on other companies to provide raw materials and major components for our products and rely on subcontractors to produce hardware elements and sub-assemblies and perform some of the services that we provide to our customers. Disruptions or performance problems caused by our subcontractors and vendors could have an adverse effect on our ability to meet our commitments to customers. Our ability to perform our


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obligations as a prime contractor could be adversely affected if one or more of the vendors or subcontractors are unable to provide the agreed-upon products or materials or perform the agreed-upon services in a timely and cost-effective manner.
 
Our costs may increase over the term of our contracts. Through cost escalation provisions contained in some of our U.S. Government contracts, we may be protected from increases in material costs to the extent that the increases in our costs are in line with industry indices. However, the difference in basis between our actual material costs and these indices may expose us to cost uncertainty even with these provisions. A significant delay in supply deliveries of our key raw materials required in our production processes could have a material adverse effect on our financial position, results of operations, or cash flows.
 
In connection with our government contracts, we are required to procure certain materials, components and parts from supply sources approved by the U.S. Government. There are currently several components for which there may be only one supplier. The inability of a sole source supplier to meet our needs could have a material adverse effect on our financial position, results of operations, or cash flows.
 
Goodwill and other intangible assets represent a significant portion of our assets and any impairment of these assets could negatively impact our results of operations.
 
At December 31, 2010, our goodwill and other intangible assets were approximately $2.4 billion, net of accumulated amortization, which represented approximately 56% of our total assets. Goodwill is tested for impairment on an annual basis, or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We also review the carrying value of finite-lived intangible assets for impairment when impairment indicators arise. We estimate the fair value of reporting units used in the goodwill impairment test using an income approach, and as a result the fair value measurements depend on revenue growth rates, future operating margin assumptions, risk-adjusted discount rates, future economic and market conditions, and identification of appropriate market comparable data. Because of the significance of our goodwill and other intangible assets, any future impairment of these assets could have a material adverse effect on our results of operations and financial condition.
 
We depend on the recruitment and retention of qualified personnel, and our failure to attract and retain such personnel could seriously harm our business.
 
Due to the specialized nature of our business, our future performance is highly dependent upon the continued services of our key engineering personnel and executive officers, the development of additional management personnel and the hiring of new qualified engineering, manufacturing, marketing, sales and management personnel for our operations. Competition for personnel is intense, and we may not be successful in attracting or retaining qualified personnel. In addition, certain personnel may be required to receive security clearance and substantial training in order to work on certain programs or perform certain tasks. The loss of key employees, our inability to attract new qualified employees or adequately train employees, or the delay in hiring key personnel could seriously harm our business, results of operations and financial condition.
 
Some of our workforce is represented by labor unions so our business could be harmed in the event of a prolonged work stoppage.
 
Approximately 2,700 of our employees are unionized, which represents approximately 14% of our employee-base at December 31, 2010. As a result, we may experience work stoppages, which could adversely affect our business. We cannot predict how stable our union relationships will be or whether we will be able to successfully negotiate successor agreements without impacting our financial condition. In addition, the presence of unions may limit our flexibility in dealing with our workforce. Work stoppages could negatively impact our ability to manufacture our products on a timely basis, which could negatively impact our results of operations and financial condition.


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We may be unable to adequately protect our intellectual property rights, which could affect our ability to compete.
 
We own many U.S. and foreign patents, trademarks, copyrights, and other forms of intellectual property. The U.S. Government has rights to use certain intellectual property that we develop in performance of government contracts, and it may use or authorize others to use such intellectual property. Our intellectual property is subject to challenge, invalidation, misappropriation or circumvention by third parties.
 
We also rely significantly upon proprietary technology, information, processes and know-how that are not protected by patents. We seek to protect this information through trade secret or confidentiality agreements with our employees, consultants, subcontractors and other parties, as well as through other security measures. These agreements and security measures may not provide meaningful protection for our unpatented proprietary information. In the event of an infringement of our intellectual property rights, a breach of a confidentiality agreement or divulgence of proprietary information, we may not have adequate legal remedies to maintain our intellectual property. Litigation to determine the scope of intellectual property rights, even if ultimately successful, could be costly and could divert management’s attention away from other aspects of our business. In addition, our trade secrets may otherwise become known or be independently developed by competitors.
 
In some instances, we have licensed the proprietary intellectual property of others, but we may be unable in the future to secure the necessary licenses to use such intellectual property on commercially reasonable terms.
 
Unforeseen environmental issues could have a material adverse effect on our financial position, results of operations, or cash flows.
 
Our operations are subject to and affected by many federal, state, local and foreign environmental laws and regulations. In addition, we could be affected by future environmental laws or regulations, including, for example, those imposed in response to climate change concerns. Compliance with current and future environmental laws and regulations currently requires and is expected to continue to require significant operating and capital costs.
 
Environmental laws and regulations may authorize substantial fines and criminal sanctions as well as facility shutdowns to address violations, and may require the installation of costly pollution control equipment or operational changes to limit emissions or discharges. We also incur, and expect to continue to incur, costs to comply with current environmental laws and regulations related to remediation of conditions in the environment. In addition, if violations of environmental laws result in our, or in one or more facilities, being placed on the “Excluded Parties List” maintained by the General Services Administration, we could become ineligible to receive certain contracts, subcontracts and other benefits from the federal government or to perform work under a government contract or subcontract at any listed facility. Generally, such ineligibility would continue until the basis for the listing has been appropriately addressed.
 
Developments such as the adoption of new environmental laws and regulations, stricter enforcement of existing laws and regulations, violations by us of such laws and regulations, discovery of previously unknown or more extensive contamination, litigation involving environmental impacts, our inability to recover costs associated with any such developments under previously priced contracts, or financial insolvency of other responsible parties could in the future have a material adverse effect on our financial position, results of operations, or cash flows.
 
Our business could be negatively impacted by security threats and other disruptions.
 
As a U.S. defense contractor, we face certain security threats, including threats to our information technology infrastructure, attempts to gain access to our proprietary or classified information, and threats to physical security. These types of events could disrupt our operations, require significant management attention and resources, and could negatively impact our reputation among our customers and the public, which could have a negative impact on our financial condition, results of operations and liquidity.


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Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our profitability.
 
We are subject to income taxes in the United States and many foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Furthermore, changes in domestic or foreign income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates assessed or changes in the taxability of certain sales or the deductibility of certain expenses, thereby affecting our income tax expense and profitability. In addition, we regularly are under audit by tax authorities. The final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. Additionally, changes in the geographic mix of our sales could also impact our tax liabilities and affect our income tax expense and profitability.
 
Risks Relating to the Spin-Off
 
We face the following risks in connection with the spin-off:
 
We may incur greater costs as an independent company than we did when we were part of ITT.
 
As a current subsidiary of ITT, we take advantage of ITT’s size and purchasing power in procuring certain goods and services such as insurance and health care benefits, and technology such as computer software licenses. We also rely on ITT to provide various corporate functions. After the spin-off, as a separate, independent entity, we may be unable to obtain these goods, services and technologies at prices or on terms as favorable to us as those we obtained prior to the distribution. We may also incur costs for functions previously performed by ITT that are higher than the amounts reflected in our historical financial statements, which could cause our profitability to decrease.
 
We expect to incur new liabilities at or prior to consummation of the spin-off, primarily relating to indebtedness and postretirement benefit plans, which may have a material adverse impact on our business, financial condition or results of operations.
 
We have historically relied upon ITT for working capital requirements on a short-term basis and for other financial support functions. After the spin-off, we will not be able to rely on the earnings, assets or cash flow of ITT, and we will be responsible for servicing our own debt, and obtaining and maintaining sufficient working capital. At or prior to the completion of the spin-off, we expect to have indebtedness in an amount estimated at $890 million, which includes $250 million aggregate principal amount of 4.250% notes due 2016 and $400 million aggregate principal amount of 5.550% senior notes due 2021 issued by us on September 20, 2011 and $240 million of commercial paper and/or to be drawn under our credit facility. The net proceeds of the notes offerings have funded, and the proceeds from our commercial paper and/or our credit facility are expected to fund, a net cash transfer of approximately $701 million to ITT, with the balance to be used for general corporate purposes. In addition, on or about the distribution date, a Credit Facility with revolving credit availability of $600 million (which includes a $100 million sublimit on letters of credit) will become effective. Given the smaller relative size of the company as compared to ITT, after the spin-off we may incur higher debt servicing costs on the new indebtedness than we would have otherwise incurred as a subsidiary of ITT or not have access to other less expensive sources of capital from short-term debt markets.
 
Our ability to make payments on and to refinance our indebtedness, including the debt incurred pursuant to the spin-off as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we are not able to repay or refinance our debt as it becomes due, we may be forced to sell assets or take other disadvantageous actions, including (i) reducing financing in the future for working capital, capital expenditures and general corporate purposes or (ii) dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness. In addition, our ability to withstand competitive pressures and to


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react to changes in the defense technology industry could be impaired. The lenders who hold such debt could also accelerate amounts due, which could potentially trigger a default or acceleration of any of our other debt.
 
Effective as of the distribution date, ITT expects to transfer to Exelis certain defined benefit pension and other postretirement benefit plans, most significantly the ITT Salaried Retirement Plan, and Exelis expects to assume all liabilities and assets associated with such plans and become the plans’ sponsor. The net liabilities associated with such plans expected to be assumed by Exelis are approximately $1,075 million at December 31, 2010. Our financial position and results of operations could be materially affected by significant changes in key economic indicators, financial market volatility, future legislation and other governmental regulatory actions.
 
We may be unable to achieve some or all of the benefits that we expect to achieve from the spin-off.
 
As an independent, publicly traded company, we believe that our business will benefit from, among other things, (i) greater strategic focus of financial resources and management’s efforts, (ii) enhanced customer focus, (iii) direct and differentiated access to capital resources, (iv) enhanced investor choices by offering investment opportunities in a separate entity from ITT, (v) improved management incentive tools, and (vi) utilization of stock as an acquisition currency. However, by separating from ITT, we may be more susceptible to market fluctuations and other adverse events than we would have been were we still a part of ITT. In addition, we may not be able to achieve some or all of the benefits that we expect to achieve as an independent company in the time we expect, if at all.
 
We may increase our debt or raise additional capital in the future, which could affect our financial health, and may decrease our profitability.
 
We may increase our debt or raise additional capital in the future, subject to restrictions in our debt agreements. If our cash flow from operations is less than we anticipate, or if our cash requirements are more than we expect, we may require more financing. However, debt or equity financing may not be available to us on terms acceptable to us, if at all. If we incur additional debt or raise equity through the issuance of our preferred stock, the terms of the debt or our preferred stock issued may give the holders rights, preferences and privileges senior to those of holders of our common stock, particularly in the event of liquidation. The terms of the debt may also impose additional and more stringent restrictions on our operations than we currently have. If we raise funds through the issuance of additional equity, your percentage ownership in us would decline. If we are unable to raise additional capital when needed, it could affect our financial health, which could negatively affect your investment in us. Also, regardless of the terms of our debt or equity financing, the amount of our stock that we can issue may be limited because the issuance of our stock may cause the distribution to be a taxable event for ITT under Section 355(e) of the Code, and under the Tax Matters Agreement, we could be required to indemnify ITT for that tax. See “— We may be responsible for U.S. Federal income tax liabilities that relate to the distribution.”
 
We may be responsible for U.S. Federal income tax liabilities that relate to the distribution.
 
We have received an IRS Ruling stating that ITT and its shareholders will not recognize any taxable income, gain or loss for U.S. Federal income tax purposes as a result of the spin-off, and we expect the IRS Ruling to remain in effect as of the date of the spin-off. In addition, the spin-off is conditioned on the receipt of an opinion of tax counsel as to the satisfaction of certain requirements necessary for the spin-off to receive tax-free treatment upon which the IRS will not rule. Receipt of the IRS Ruling and opinion of counsel will satisfy a condition to completion of the spin-off. See “The Spin-Off — U.S. Federal Income Tax Consequences of the Spin-Off.” The IRS Ruling, while generally binding upon the IRS, will be based on certain factual statements and representations. If any such factual statements or representations were incomplete or untrue in any material respect, or if the facts on which the IRS Ruling will be based are materially different from the facts at the time of the spin-off, the IRS could modify or revoke the IRS Ruling retroactively.
 
As discussed above, certain requirements for tax-free treatment that are not covered in the IRS Ruling will be addressed in the opinion of counsel. An opinion of counsel is not binding on the IRS. Accordingly, the


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IRS may reach conclusions with respect to the spin-off that are different from the conclusions reached in the opinion. Like the IRS Ruling, the opinion will be based on certain factual statements and representations, which, if incomplete or untrue in any material respect, could alter counsel’s conclusions.
 
ITT is not aware of any facts or circumstances that would cause any such factual statements or representations in the IRS Ruling or the legal opinion to be incomplete or untrue or cause the facts on which the IRS Ruling is based, or the legal opinion will be based, to be materially different from the facts at the time of the spin-off.
 
If all or a portion of the spin-off does not qualify as a tax-free transaction because any of the factual statements or representations in the IRS Ruling or the legal opinion are incomplete or untrue, or because the facts upon which the IRS Ruling is based are materially different from the facts at the time of the spin-off, ITT would recognize a substantial gain for U.S. Federal income tax purposes. In such case, under U.S. Treasury regulations each member of the ITT consolidated group at the time of the spin-off (including us and our subsidiaries), would be severally liable for the entire amount of any resulting U.S. Federal income tax liability.
 
Even if the spin-off otherwise qualifies as a tax-free transaction for U.S. Federal income tax purposes, the distribution will be taxable to ITT (but not to ITT shareholders) pursuant to Section 355(e) of the Code if there are one or more acquisitions (including issuances) of the stock of either us or ITT, representing 50% or more, measured by vote or value, of the then-outstanding stock of either corporation and the acquisition or acquisitions are deemed to be part of a plan or series of related transactions that include the distribution. Any acquisition of our common stock within two years before or after the distribution (with exceptions, including public trading by less-than-5% shareholders and certain compensatory stock issuances) generally will be presumed to be part of such a plan unless that presumption is rebutted. The tax liability resulting from the application of Section 355(e) would be substantial. In addition, under U.S. Treasury regulations, each member of the ITT consolidated group at the time of the spin-off (including us and our subsidiaries) would be severally liable for the resulting U.S. Federal income tax liability.
 
We will agree not to enter into any transaction that could cause any portion of the spin-off to be taxable to ITT, including under Section 355(e). Pursuant to the Tax Matters Agreement, we will also agree to indemnify ITT and Xylem for any tax liabilities resulting from such transactions, and ITT and Xylem will agree to indemnify us for any tax liabilities resulting from such transactions entered into by ITT or Xylem. These obligations may discourage, delay or prevent a change of control of our company. For additional detail, see “Description of Capital Stock — Provisions of Our Amended and Restated Articles of Incorporation and Amended and Restated By-Laws That Could Delay or Prevent a Change in Control” and “Certain Relationships and Related Party Transactions — Agreements with ITT and Xylem Related to the Spin-Off — Tax Matters Agreement.”
 
Our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject following the distribution.
 
Our financial results previously were included within the consolidated results of ITT, and we believe that our financial reporting and internal controls were appropriate for those of subsidiaries of a public company. However, we were not directly subject to the reporting and other requirements of the Exchange Act. As a result of the distribution, we will be directly subject to reporting and other obligations under the Exchange Act. Beginning with our Annual Report on Form 10-K for the year ending December 31, 2012, we will be required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) which will require annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm addressing these assessments. These reporting and other obligations may place significant demands on our management, administrative and operational resources, including accounting systems and resources.
 
The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. Under the Sarbanes-Oxley Act, we are required to maintain effective disclosure controls and procedures and internal controls over financial reporting. To comply with these requirements, we may need to upgrade our systems; implement additional financial and management controls, reporting systems


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and procedures; and hire additional accounting and finance staff. We expect to incur additional annual expenses for the purpose of addressing these requirements, and those expenses may be significant. If we are unable to upgrade our financial and management controls, reporting systems, information technology systems and procedures in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies under the Exchange Act could be impaired. Any failure to achieve and maintain effective internal controls could have a material adverse effect on our financial condition, results of operations or cash flows.
 
We do not have a recent operating history as an independent company and our historical financial information may not be a reliable indicator of our future results.
 
The historical financial information we have included in this Information Statement has been derived from ITT’s consolidated financial statements and does not necessarily reflect what our financial position, results of operations and cash flows would have been as a separate, stand-alone entity during the periods presented. ITT did not account for us, and we were not operated, as a single stand-alone entity for the periods presented even if we represented a reporting segment in ITT’s historical consolidated financial statements. In addition, the historical information is not necessarily indicative of what our results of operations, financial position and cash flows will be in the future. For example, following the spin-off, changes will occur in our cost structure, funding and operations, including changes in our tax structure, increased costs associated with reduced economies of scale and increased costs associated with becoming a public, stand-alone company. While we have been profitable as part of ITT, we cannot assure you that as a stand-alone company our profits will continue at a similar level.
 
Our customers, prospective customers and suppliers will need assurances that our financial stability on a stand-alone basis is sufficient to satisfy their requirements for doing or continuing to do business with them.
 
Some of our customers, prospective customers and suppliers will need assurances that our financial stability on a stand-alone basis is sufficient to satisfy their requirements for doing or continuing to do business with them. If our customers, prospective customers or suppliers are not satisfied with our financial stability, it could have a material adverse effect on our ability to bid for and obtain or retain projects, our business, financial condition or results of operations.
 
The spin-off may expose us to potential liabilities arising out of state and federal fraudulent conveyance laws and legal distribution requirements.
 
The spin-off could be challenged under various state and federal fraudulent conveyance laws. An unpaid creditor or an entity vested with the power of such creditor (such as a trustee or debtor-in-possession in a bankruptcy) could claim that the spin-off left ITT insolvent or with unreasonably small capital or that ITT intended or believed it would incur debts beyond its ability to pay such debts as they mature and that ITT did not receive fair consideration or reasonably equivalent value in the spin-off. If a court were to agree with such a plaintiff, then such court could void the spin-off as a fraudulent transfer and could impose a number of different remedies, including without limitation, returning our assets or your shares in our company to ITT, voiding our liens and claims against ITT, or providing ITT with a claim for money damages against us in an amount equal to the difference between the consideration received by ITT and the fair market value of our company at the time of the spin-off.
 
The measure of insolvency for purposes of the fraudulent conveyance laws will vary depending on which jurisdiction’s law is applied. Generally, however, an entity would be considered insolvent if either the fair saleable value of its assets is less than the amount of its liabilities (including the probable amount of contingent liabilities), or it is unlikely to be able to pay its liabilities as they become due. No assurance can be given as to what standard a court would apply to determine insolvency or that a court would determine that ITT was solvent at the time of or after giving effect to the spin-off, including the distribution of our common stock.


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The distribution by ITT of the Exelis common stock in the spin-off could also be challenged under state corporate distribution statutes. Under the Indiana Business Corporation Law (the “Indiana Corporation Law”), a corporation may not make distributions to its shareholders if, after giving effect to the distribution, (i) the corporation would not be able to pay its debts as they become due in the usual course of business; or (ii) the corporation’s total assets would be less than the sum of its total liabilities. No assurance can be given that a court will not later determine that the distribution by ITT of Exelis common stock in the spin-off was unlawful.
 
Under the Distribution Agreement, from and after the spin-off, we will be responsible for the debts, liabilities and other obligations related to the business or businesses which we own and operate following the consummation of the spin-off. Although we do not expect to be liable for any of these or other obligations not expressly assumed by us pursuant to the Distribution Agreement, it is possible that we could be required to assume responsibility for certain obligations retained by ITT or Xylem should ITT or Xylem fail to pay or perform its retained obligations (for example, tax, asbestos and/or environmental liabilities). See “Certain Relationships and Related Party Transactions — Agreements with ITT and Xylem Related to the Spin-Off — Distribution Agreement.”
 
We may have been able to receive better terms from unaffiliated third parties than the terms we receive in our agreements related to the spin-off.
 
We expect that the agreements related to the spin-off, including the Distribution Agreement, Benefits and Compensation Matters Agreement, Technology License Agreement, Tax Matters Agreement, Master Transition Services Agreement and any other agreements, will be negotiated in the context of our separation from ITT while we are still part of ITT. Accordingly, these agreements may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties. The terms of the agreements being negotiated in the context of our separation are related to, among other things, allocations of assets, liabilities, rights, indemnifications and other obligations among ITT, Xylem and us. We may have received better terms under the agreements related to the spin-off from third parties because third parties may have competed with each other to win our business. See “Certain Relationships and Related Party Transactions — Agreements with ITT and Xylem Related to the Spin-Off.”
 
Risks Relating to Our Common Stock
 
You face the following risks in connection with ownership of our common stock:
 
There is no existing market for our common stock and we cannot be certain that an active trading market will develop or be sustained after the spin-off, and following the spin-off, our stock price may fluctuate significantly.
 
There currently is no public market for our common stock. We intend to list our common stock on the NYSE. See “Trading Market.” It is anticipated that before the distribution date for the spin-off, trading of shares of our common stock will begin on a “when-issued” basis and such trading will continue up to and including the distribution date. However, there can be no assurance that an active trading market for our common stock will develop as a result of the spin-off or be sustained in the future. The lack of an active market may make it more difficult for you to sell our common stock and could lead to the price of our common stock being depressed or more volatile. We cannot predict the prices at which our common stock may trade after the spin-off. The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including:
 
  •  the sale of our shares by some ITT shareholders after the distribution because our business profile and market capitalization may not fit their investment objectives;
 
  •  actual or anticipated fluctuations in our operating results due to factors related to our business;
 
  •  success or failure of our business strategy;
 
  •  our quarterly or annual earnings, or those of other companies in our industry;


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  •  our ability to obtain financing as needed;
 
  •  announcements by us or our competitors of significant new business awards;
 
  •  announcements by us or our competitors of significant acquisitions or dispositions;
 
  •  changes in accounting standards, policies, guidance, interpretations or principles;
 
  •  the failure of securities analysts to cover our common stock after the spin-off;
 
  •  changes in earnings estimates by securities analysts or our ability to meet those estimates;
 
  •  the operating and stock price performance of other comparable companies;
 
  •  investor perception of our company and the defense technology industry;
 
  •  natural or environmental disasters that investors believe may affect us;
 
  •  overall market fluctuations;
 
  •  fluctuations in the budget of federal, state and local governmental entities around the world;
 
  •  results from any material litigation or government investigation;
 
  •  changes in laws and regulations affecting our business; and
 
  •  general economic conditions and other external factors.
 
Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could adversely affect the trading price of our common stock.
 
Substantial sales of our common stock may occur in connection with the spin-off, which could cause the price of our common stock to decline.
 
The shares of our common stock that ITT distributes to its shareholders generally may be sold immediately in the public market. It is possible that some ITT shareholders, which could include some of our larger shareholders, will sell our common stock received in the distribution if, for reasons such as our business profile or market capitalization as an independent company, we do not fit their investment objectives, or — in the case of index funds — we are not a participant in the index in which they are investing. The sales of significant amounts of our common stock or the perception in the market that this will occur may reduce the market price of our common stock.
 
We cannot assure you that we will pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends on our common stock.
 
Following the distribution, we expect that initially Exelis will pay a dividend, although the timing, declaration, amount and payment of future dividends to our shareholders fall within the discretion of our Board of Directors and will depend on many factors, including our financial condition, results of operations and capital requirements, as well as applicable law, regulatory constraints, industry practice and other business considerations that Exelis’s Board of Directors considers relevant. In addition, the terms of the agreements governing our new debt or debt that we may incur in the future may limit or prohibit the payments of dividends. See “Dividend Policy.” There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence the payment of dividends. There can also be no assurance that the combined annual dividends on ITT common stock, Xylem common stock and our common stock after the spin-off, if any, will be equal to the annual dividends on ITT common stock prior to the spin-off.
 
Additionally, indebtedness that we expect to incur in connection with the spin-off could have important consequences for holders of our common stock. If we cannot generate sufficient cash flow from operations to meet our debt-payment obligations, then our ability to pay dividends, if so determined by the Board of Directors, will be impaired and we may be required to attempt to restructure or refinance our debt, raise additional capital or take other actions such as selling assets, reducing or delaying capital expenditures or reducing our dividend. There can be no assurance, however, that any such actions could be effected on satisfactory terms, if at all, or would be permitted by the terms of our new debt or our other credit and


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contractual arrangements. In addition, the terms of the agreements governing new debt that we expect to incur at or prior to the spin-off or that we may incur in the future may limit or prohibit the payment of dividends.
 
Anti-takeover provisions in our organizational documents and Indiana law could delay or prevent a change in control.
 
Prior to completion of the spin-off, we will adopt the amended and restated articles of incorporation and the amended and restated by-laws. Certain provisions of the amended and restated articles of incorporation and the amended and restated by-laws may delay or prevent a merger or acquisition that a shareholder may consider favorable. For example, the amended and restated articles of incorporation and the amended and restated by-laws, among other things, provide for a classified board and require advance notice for shareholder proposals and nominations, do not permit shareholders to convene special meetings and do not permit action by written consent of the shareholders. In addition, the amended and restated articles of incorporation authorizes our Board of Directors to issue one or more series of preferred stock. These provisions may also discourage acquisition proposals or delay or prevent a change in control, which could harm our stock price. Indiana law also imposes some restrictions on mergers and other business combinations between any holder of 10% or more of our outstanding common stock and us as well as certain restrictions on the voting rights of “control shares” of an “issuing public corporation.” See “Description of Capital Stock.”
 
Under the Tax Matters Agreement, we will agree not to enter into any transaction involving an acquisition (including issuance) of Exelis common stock or any other transaction (or, to the extent we have the right to prohibit it, to permit any such transaction) that could cause the distribution to be taxable to ITT. We will also agree to indemnify ITT for any tax resulting from any such transactions. Generally, ITT will recognize taxable gain on the distribution if there are one or more acquisitions (including issuances) of our capital stock, directly or indirectly, representing 50% or more, measured by vote or value, of our then-outstanding capital stock, and the acquisitions or issuances are deemed to be part of a plan or series of related transactions that include the distribution. Any such shares of our common stock acquired, directly or indirectly, within two years before or after the distribution (with exceptions, including public trading by less-than-5% shareholders and certain compensatory stock issuances) will generally be presumed to be part of such a plan unless that presumption is rebutted. As a result, our obligations may discourage, delay or prevent a change of control of our company.


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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
 
We have made forward-looking statements in this Information Statement, including in the sections entitled “Summary,” “Risk Factors,” “Questions and Answers About the Spin-Off,” “The Spin-Off,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, benefits resulting from our separation from ITT, the effects of competition and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believe,” “expect,” “plan,” “intend,” “anticipate,” “estimate,” “predict,” “potential,” “continue,” “may,” “might,” “should,” “could” or the negative of these terms or similar expressions.
 
Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forward-looking statements in this Information Statement. We do not have any intention or obligation to update forward-looking statements after we distribute this Information Statement.
 
The risk factors discussed in “Risk Factors” could cause our results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. Any such risks could cause our results to differ materially from those expressed in forward-looking statements.


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THE SPIN-OFF
 
Background
 
On January 11, 2011, the Board of Directors of ITT approved a plan to spin-off Exelis and Xylem from ITT, following which Exelis and Xylem will be independent, publicly traded companies. Immediately prior to the spin-off, ITT will effect an internal reorganization in order to properly align the appropriate businesses within each of the Exelis and Xylem parent companies.
 
To complete the spin-off, ITT will, following the internal reorganization, distribute to its shareholders all of the shares of our common stock and the common stock of Xylem. The distribution will occur on the distribution date, which is expected to be October 31, 2011. Each holder of ITT common stock will receive one share of our common stock, and one share of Xylem common stock, for each share of ITT common stock held on October 17, 2011, the record date. After completion of the spin-off:
 
  •  we will be an independent, publicly traded company (NYSE: XLS) and will own and operate ITT’s C4ISR electronics and systems, and informational and technical services businesses;
 
  •  Xylem will be an independent, publicly traded company (NYSE: XYL), and will own and operate ITT’s water infrastructure and applied water businesses; and
 
  •  ITT will continue to be an independent, publicly traded company (NYSE: ITT) and will continue to own and operate its industrial process, motion technologies, interconnect solutions and control technologies businesses.
 
Each holder of ITT common stock will continue to hold his, her or its shares in ITT. No vote of ITT’s shareholders is required or is being sought in connection with the spin-off, and ITT’s shareholders will not have any appraisal rights in connection with the spin-off, including the internal reorganization.
 
The distribution of our common stock as described in this Information Statement is subject to the satisfaction or waiver of certain conditions. In addition, ITT has the right not to complete the spin-off if, at any time prior to the distribution, the Board of Directors of ITT determines, in its sole discretion, that the spin-off is not then in the best interests of ITT or its shareholders or other constituents, that a sale or other alternative is in the best interests of ITT or its shareholders or other constituents or that it is not advisable for us to separate from ITT at that time. See “— Conditions to the Spin-Off.”
 
Reasons for the Spin-Off
 
ITT’s Board of Directors has determined that the spin-off is in the best interests of ITT and its shareholders because the spin-off will provide the following key benefits: (i) greater strategic focus of financial resources and management’s efforts, (ii) enhanced customer focus, (iii) direct and differentiated access to capital resources, (iv) enhanced investor choices by offering investment opportunities in separate entities, (v) improved management incentive tools, and (vi) utilization of stock as an acquisition currency.
 
Greater Strategic Focus of Financial Resources and Management’s Efforts.  ITT’s Defense business represents a discrete portion of ITT’s overall business. It has historically exhibited different financial and operating characteristics than ITT’s other businesses. In particular, the Defense business is generally characterized by cycles that are comparatively lengthy relative to those of the Water business and ITT’s Industrial Process, Motion Technologies, Interconnect Solutions and Control Technologies businesses, which necessitates different capital expenditure and acquisition strategies than would be otherwise employed. ITT’s and our management believe that ITT’s management resources would be more efficiently utilized if ITT’s management concentrated solely on its Industrial Process, Motion Technologies, Interconnect Solutions and Control Technologies businesses, that Xylem’s management resources would be more efficiently utilized if its management concentrated solely on the Water business, and that our management resources would be more efficiently utilized if our management concentrated solely on the Defense business. Consequently, ITT has determined that its current structure may not be the most effective to design and implement the distinct strategies necessary to operate in a manner that maximizes the long-term value of each company.


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Both ITT and we expect to have better use of management and financial resources as a result of having board and management teams solely focused on their respective businesses. The spin-off will allow us to better align management’s attention, compensation and resources to pursue opportunities in the defense technology and information solutions market and to manage our cost structure more actively. ITT and Xylem will similarly benefit from their respective management’s ability to focus on the management and operation of their respective businesses.
 
Enhanced Customer Focus.  Both ITT and we believe that, as a unified, commonly managed, stand-alone defense technology and information solutions business, our management will be able to focus solely on the needs of our own customers, without dilution arising from a connection to a larger parent with tangential goals and incentives.
 
Direct and Differentiated Access to Capital Resources.  After the spin-off, we will no longer need to compete with ITT’s other businesses for capital resources. As a long-cycle U.S. defense business with strong U.S. cash flow generation, our business has different financial and operating characteristics from ITT’s other businesses. Both ITT and we believe that direct and differentiated access to capital resources will allow each of us to better optimize the amounts and terms of the capital needed for each of the respective businesses, aligning financial and operational characteristics with investor and market expectations. ITT’s management also believes that, as a separate entity, we will have ready access to capital, because we will attract investors who are interested in the characteristics of the Defense business.
 
Enhanced Investor Choices by Offering Investment Opportunities in Separate Entities.  After the spin-off, investors should be better able to evaluate our financial performance, as well as our strategy within the context of our markets, thereby enhancing the likelihood that we will achieve an appropriate market valuation. ITT’s management and financial advisors believe that the investment characteristics of the Defense business may appeal to different types of investors. As a result of the spin-off, our management should be able to implement goals and evaluate strategic opportunities in light of investor expectations within our specialties without undue attention to investor expectations in other specialties. In addition, we should be able to focus our public relations efforts on cultivating our own separate identity. We believe that defense-focused investors will understand the duration of our long-term cycle.
 
Improved Management Incentive Tools.  It is expected that we will use our equity to compensate current and future employees. In multi-business companies such as ITT, it is difficult to structure incentives that reward managers in a manner directly related to the performance of their respective business units. By granting stock linked to a specific business, equity compensation will be in line with the financial results of the managers’ direct work product. As a result, the incentives offered by the compensation plan will be less diluted. In addition, reducing the conglomerate discount that currently impacts ITT stock may provide each business with a more attractive currency for equity-based compensation.
 
Utilization of Stock as an Acquisition Currency.  Although we are not currently evaluating any acquisitions involving the use of our stock, the spin-off will enable us to use our stock as currency to pursue certain financial and strategic objectives, including tax-free merger transactions. In addition, future strategic transactions with similar businesses will be more easily facilitated through the use of our stand-alone stock as consideration.
 
ITT’s Board of Directors also considered a number of potentially negative factors in evaluating the spin-off, including the following:
 
  •  The decreased capital available for investment:  The Company has historically relied upon ITT for working capital requirements on a short-term basis and for other financial support functions. After the spin-off, the Company will not be able to rely on the earnings, assets or cash flow of ITT, and the Company will be responsible for servicing its own debt, and obtaining and maintaining sufficient working capital.
 
  •  The loss of synergies from operating as one company:  As a current part of ITT, the Company takes advantage of ITT’s size and purchasing power in procuring certain goods and services such as insurance and health care benefits, and technology such as computer software licenses. After the spin-off, as a


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  separate, independent entity, the Company may be unable to obtain these goods, services and technologies at prices or on terms as favorable to us as those the Company obtained prior to the distribution. The Company may also incur costs for functions previously performed by ITT that are higher than the amounts reflected in the Company’s historical financial statements, which could cause the Company’s profitability to decrease.
 
  •  Potential disruptions to the businesses as a result of the spin-off:  Some of the Company’s customers, prospective customers, and suppliers will need assurances that its financial stability on a stand-alone basis is sufficient to satisfy their requirements for doing or continuing to do business with them. If the Company’s customers, prospective customers or suppliers are not satisfied with the Company’s financial stability, it could have a material adverse effect on the Company’s ability to bid for and obtain or retain projects, the Company’s business, financial condition or results of operations.
 
  •  The potential effect of the spin-off on the anticipated credit ratings of the separated companies and risks associated with refinancing ITT’s debt:  Given the smaller relative size of the Company as compared to ITT, after the spin-off the Company may incur higher debt servicing costs on the new indebtedness than it would have incurred otherwise as a subsidiary of ITT or not have access to other less expensive sources of capital from short-term debt markets.
 
  •  Risks of being unable to achieve the benefits expected from the spin-off:  By separating from ITT, the Company may be more susceptible to market fluctuations and other adverse events than the Company would have been were it still a part of ITT; actual or anticipated fluctuations in the Company’s operating results due to factors related to the Company’s business; competitive pressures by new or existing competitors of the Company; and investor perception of the company and its industry, among others.
 
  •  The reaction of ITT’s shareholders to the spin-off:  The market price of the Company’s common stock may fluctuate widely, depending on many factors, some of which may be beyond the Company’s control, including the sale of its shares by some ITT shareholders after the distribution because the Company’s business profile and market capitalization may not fit their investment objectives.
 
  •  The risk that the plan of execution might not be completed and the one-time and ongoing costs of the spin-off:  There are risks and uncertainties relating to the execution of the spin-off, including the timing and certainty of the completion of the internal reorganization prior to the distribution. In addition, the Company will incur costs in connection with the transition to being a stand-alone public company that relate primarily to accounting, tax and other professional costs; compensation, such as modifications to certain bonus awards, upon completion of the separation; relocation costs; recruiting and relocation costs associated with hiring key senior management personnel new to the Company; costs related to establishing a new brand in the marketplace; and costs to separate information systems.
 
Notwithstanding these costs and risks, however, ITT’s Board of Directors determined that the potential benefits of the spin-off outweighed these factors.
 
Manner of Effecting the Spin-Off
 
The general terms and conditions relating to the spin-off will be set forth in a Distribution Agreement among us, ITT and Xylem.
 
Internal Reorganization
 
As part of the spin-off, ITT will undergo an internal reorganization that will, among other things and subject to limited exceptions: (i) allocate and transfer to each of Exelis and Xylem and their respective subsidiaries, as applicable, those assets, and to allocate and assign responsibility for those liabilities, in respect of the activities of the applicable businesses of such entities and (ii) allocate, transfer and assign, as applicable, those assets and liabilities in respect of other current and former businesses and activities of ITT and its current and former subsidiaries.


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Distribution of Shares of Our Common Stock
 
Under the Distribution Agreement, the distribution will be effective as of 12:01 a.m., New York time, on October 31, 2011, the distribution date. As a result of the spin-off, on the distribution date, each holder of ITT common stock will receive one share of our common stock for each share of ITT common stock that he, she or it owns. In order to receive shares of our common stock in the spin-off, an ITT shareholder must be a shareholder at 5:00 p.m., New York time, on October 17, 2011, the record date.
 
Following completion of the spin-off, ITT Corporation’s global platform will include ITT’s Industrial Process business, as well as its Motion Technologies, Interconnect Solutions and Control Technologies businesses; Xylem will be formed through the combination of three of ITT’s businesses: Residential & Commercial Water, Flow Control and Water & Wastewater (including biological, filtration and disinfection treatment and analytics); and Exelis will comprise ITT’s existing Defense and Information Solutions segment. The diagram below shows the structure, simplified for illustrative purposes only, of ITT, Xylem and Exelis after completion of the spin-off:
 
(FLOW CHART)
 
On the distribution date, ITT will release the shares of our common stock (as well as the Xylem common stock) to our distribution agent to distribute to ITT shareholders. For most of these ITT shareholders, our distribution agent will credit their shares of our common stock to book-entry accounts established to hold their shares of our common stock. Our distribution agent will send these shareholders, including any ITT shareholder that holds physical share certificates of ITT common stock and is the registered holder of such shares of ITT common stock represented by those certificates on the record date, a statement reflecting their ownership of our common stock and Xylem common stock. Book-entry refers to a method of recording stock ownership in our records in which no physical certificates are used. For shareholders who own ITT common stock through a broker or other nominee, their shares of our common stock will be credited to these shareholders’ accounts by the broker or other nominee. It is expected that it will take the distribution agent up to two weeks to issue shares of our common stock to ITT shareholders or their bank or brokerage firm electronically by way of direct registration in book-entry form. Trading of our stock will not be affected by this delay in issuance by the distribution agent. Following the spin-off, shareholders whose shares are held in book-entry form may request that their shares of our common stock be transferred to a brokerage or other account at any time.


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ITT shareholders will not be required to make any payment or surrender or exchange their shares of ITT common stock or take any other action to receive their shares of our common stock. No vote of ITT shareholders is required or sought in connection with the spin-off, including the internal reorganization, and ITT shareholders have no appraisal rights in connection with the spin-off.
 
U.S. Federal Income Tax Consequences of the Spin-Off
 
As a condition to the spin-off, ITT will have received the IRS Ruling substantially to the effect that, among other things, the distribution, together with certain related transactions, will qualify under Sections 355 and 368(a)(1)(D) of the Code as a tax-free spin-off to the holders of ITT common stock and will be tax-free to ITT. In addition, the spin-off is conditioned on the receipt of an opinion of tax counsel as to the satisfaction of certain requirements necessary for the distribution, together with certain related transactions, to receive tax-free treatment under Sections 355 and 368(a)(1)(D) of the Code upon which the IRS will not rule. Assuming the distribution qualifies under Section 355 of the Code as tax-free:
 
  •  no gain or loss will be recognized by, and no amount will be included in the income of, holders of ITT common stock upon their receipt of shares of our common stock (as well as Xylem common stock) in the distribution;
 
  •  the basis of ITT common stock immediately before the distribution will be allocated between the ITT common stock, the Xylem common stock and our common stock received in the distribution, in proportion with relative fair market values at the time of the distribution;
 
  •  the holding period of the Exelis common stock and our common stock received by each ITT shareholder will include the period during which the shareholder held the ITT common stock on which the distribution is made, provided that the ITT common stock is held as a capital asset on the distribution date; and
 
  •  no gain or loss will be recognized by ITT upon the distribution of our common stock.
 
U.S. Treasury regulations require certain shareholders that receive stock in a spin-off to attach to their respective U.S. Federal income tax returns, for the year in which the spin-off occurs, a detailed statement setting forth certain information relating to the spin-off. Shortly after the distribution, ITT will provide shareholders who receive our common stock in the distribution with the information necessary to comply with that requirement, as well as information to help shareholders allocate their stock basis between their ITT common stock, the Exelis common stock and the Xylem common stock.
 
The IRS Ruling and the opinion of counsel will be conditioned on the truthfulness and completeness of certain factual statements and representations provided by ITT and us. If those factual statements and representations are incomplete or untrue in any material respect, the IRS Ruling could become inoperative and counsel’s conclusions may be altered. ITT and we have reviewed the statements of fact and representations on which the IRS Ruling is, and the opinion of counsel will be, based, and neither ITT nor we are aware of any facts or circumstances that would cause any of the statements of fact or representations to be incomplete or untrue. Each of ITT, Xylem and us have agreed to some restrictions on our future actions to provide further assurance that the distribution will qualify as a tax-free distribution under Section 355 of the Code.
 
As discussed above, certain requirements for tax-free treatment that are not covered in the IRS Ruling will be addressed in the opinion of counsel. An opinion of counsel is not binding on the IRS. Accordingly, the IRS may reach conclusions with respect to the spin-off that are different from the conclusions reached in the opinion.
 
If the distribution does not qualify under Section 355 of the Code, each holder of ITT common stock receiving our common stock in the distribution would be treated as receiving a taxable distribution in an amount equal to the fair market value of our common stock received, which would result in:
 
  •  a taxable dividend to the extent of the shareholder’s pro rata share of ITT’s current and accumulated earnings and profits;


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  •  a reduction in the shareholder’s basis in ITT common stock to the extent the amount received exceeds such shareholder’s share of earnings and profits;
 
  •  taxable gain from the exchange of ITT common stock to the extent the amount received exceeds both the shareholder’s share of earnings and profits and the shareholder’s basis in ITT common stock; and
 
  •  basis in our stock equal to its fair market value on the date of the distribution.
 
Under certain circumstances ITT would recognize taxable gain on the distribution. These circumstances would include the following:
 
  •  the distribution does not qualify as tax-free under Section 355 of the Code; and
 
  •  there are one or more acquisitions (including issuances) of either our stock, the stock of Xylem, or the stock of ITT, representing 50% or more, measured by vote or value, of the then-outstanding stock of that corporation, and the acquisition or acquisitions are deemed to be part of a plan or series of related transactions that include the distribution. Any such acquisition of our stock, the stock of Xylem, or the stock of ITT within two years before or after the distribution (with exceptions, including public trading by less-than-5% shareholders and certain compensatory stock issuances) generally will be presumed to be part of such a plan unless that presumption is rebutted.
 
The amount of such gain would result in a significant federal income tax liability to ITT.
 
We will agree to indemnify ITT for any tax liabilities of ITT resulting from the distribution under certain circumstances. Our obligation to indemnify ITT may discourage, delay or prevent a change of control of our company. In addition, under U.S. Treasury regulations, each member of the ITT consolidated tax return group at the time of the spin-off (including us and our subsidiaries) would be severally liable to the IRS for such tax liability. The resulting tax liability may have a material adverse effect on both our and ITT’s business, financial condition, results of operations or cash flows.
 
The preceding summary of certain anticipated U.S. Federal income tax consequences of the spin-off is for general informational purposes only. ITT shareholders should consult their own tax advisors as to the specific tax consequences of the spin-off to them, including the application and effect of state, local or non-U.S. tax laws and of changes in applicable tax laws.
 
Results of the Spin-Off
 
After the spin-off, we will be an independent, publicly traded company. Immediately following the spin-off, we expect to have approximately 20,000 holders of shares of our common stock and approximately 184 million shares of our common stock outstanding, based on the number of shareholders and outstanding shares of ITT common stock on August 31, 2011. The figures assume no exercise of outstanding options and exclude shares of ITT common stock held directly or indirectly by ITT, if any. The actual number of shares to be distributed will be determined on the record date and will reflect any exercise of ITT options between the date the ITT Board of Directors declares the dividend for the distribution and the record date for the distribution.
 
For information regarding options to purchase shares of our common stock that will be outstanding after the distribution, see “Capitalization,” “Certain Relationships and Related Party Transactions — Agreements with ITT and Xylem Related to the Spin-Off — Benefits and Compensation Matters Agreement” and “Management.”
 
Before the spin-off, we will enter into several agreements with ITT to effect the spin-off and provide a framework for our relationship with ITT and Xylem after the spin-off. These agreements will govern the relationship between us, Xylem and ITT after completion of the spin-off and provide for the allocation between us, Xylem and ITT of ITT’s assets, liabilities, rights and obligations. See “Certain Relationships and Related Party Transactions — Agreements with ITT and Xylem Related to the Spin-Off.”
 
Trading Prior to the Distribution Date
 
It is anticipated that, at least two trading days prior to the record date and continuing up to and including the distribution date, there will be a “when-issued” market in our common stock. When-issued trading refers


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to a sale or purchase made conditionally because the security has been authorized but not yet issued. The when-issued trading market will be a market for shares of our common stock that will be distributed to ITT shareholders on the distribution date. Any ITT shareholder who owns shares of ITT common stock at the close of business on the record date will be entitled to shares of our common stock distributed in the spin-off. ITT shareholders may trade this entitlement to shares of our common stock, without the shares of ITT common stock they own, on the when-issued market. On the first trading day following the distribution date, we expect when-issued trading with respect to our common stock will end and “regular-way” trading will begin. See “Trading Market.”
 
Following the distribution date, we expect shares of our common stock to be listed on the NYSE under the ticker symbol “XLS”. We will announce the when-issued ticker symbol when and if it becomes available.
 
It is also anticipated that, at least two trading days prior to the record date and continuing up to and including the distribution date, there will be two markets in ITT common stock: a “regular-way” market and an “ex-distribution” market. Shares of ITT common stock that trade on the regular-way market will trade with an entitlement to shares of our common stock (as well as shares of Xylem common stock) distributed pursuant to the distribution. Shares that trade on the ex-distribution market will trade without an entitlement to shares of our common stock (as well as shares of Xylem common stock) distributed pursuant to the distribution. Therefore, if shares of ITT common stock are sold in the regular-way market up to and including the distribution date, the selling shareholder’s right to receive shares of our common stock (as well as shares of Xylem common stock) in the distribution will be sold as well. However, if ITT shareholders own shares of ITT common stock at the close of business on the record date and sell those shares on the ex-distribution market up to and including the distribution date, the selling shareholders will still receive the shares of our common stock (as well as shares of Xylem common stock) that they would otherwise receive pursuant to the distribution. See “Trading Market.”
 
Treatment of 401(k) Shares for Current and Former Employees
 
Our Employees Invested in the ITT Stock Fund of the ITT 401(k) Plan As of Immediately Prior to the Distribution Date.
 
At the time of the distribution, the ITT 401(k) Plan will be transferred to Exelis, and, on and following such time, will be renamed the Exelis 401(k) Plan. Our current and former employees who hold accounts in the ITT 401(k) Plan as of immediately prior to the distribution date will remain participants in the renamed Exelis 401(k) Plan on and following the distribution date. On the distribution date, shares of our common stock and shares of Xylem common stock, based on the distribution ratio for each share of ITT common stock held in such employee’s ITT stock fund account as of immediately prior to the distribution date, will be included in new Exelis and Xylem stock fund accounts under the Exelis 401(k) Plan. However, in conformity with the fiduciary responsibility requirements of ERISA, remaining shares of ITT and Xylem common stock held in our employees’ ITT and Xylem stock fund accounts following the distribution will be disposed of and allocated to another investment alternative available under the Exelis 401(k) Plan if and when directed by participants, and any such shares remaining at such time as will be determined in the sole discretion of the fiduciaries of the Exelis 401(k) Plan will be automatically disposed of and the proceeds invested in another such investment alternative (but this will not prohibit diversified, collectively managed investment alternatives available under the Exelis 401(k) Plan from holding ITT or Xylem common stock or prohibit employees who use self-directed accounts in the Exelis 401(k) Plan from investing their accounts in ITT or Xylem common stock).
 
ITT Employees Invested in the ITT Stock Fund of the ITT 401(k) Plan As of Immediately Prior to the Distribution Date.
 
Current and former ITT employees who hold shares of ITT common stock in the ITT 401(k) Plan as of immediately prior to the distribution date will receive shares of our common stock and shares of Xylem common stock in the distribution and will have their accounts transferred to the newly created ITT 401(k) Plan as soon as practicable after the distribution date. Our shares and shares of Xylem common stock will be included in new, temporary stock funds under the newly created ITT 401(k) Plan. In conformity with the


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fiduciary responsibility requirements of ERISA, remaining shares of our common stock and shares of Xylem common stock held in these temporary stock funds following the distribution will be disposed of and allocated to another investment alternative available under the newly created ITT 401(k) Plan when directed by participants, and any such shares remaining at such time as will be determined in the sole discretion of the fiduciaries of the newly created ITT 401(k) Plan, will be automatically disposed of and the proceeds invested in another such investment alternative (but this will not prohibit diversified, collectively managed investment alternatives available under the newly created ITT 401(k) Plan from holding our common stock or Xylem common stock or prohibit employees who use self-directed accounts in the newly created ITT 401(k) Plan from investing their accounts in our common stock or Xylem common stock).
 
Incurrence of Debt
 
It is anticipated that, at or prior to the completion of the spin-off, Exelis will raise indebtedness in an amount estimated at $890 million, which includes $650 million aggregate principal amount of notes issued by us on September 20, 2011 and $240 million of commercial paper and/or to be drawn under our credit facility. The net proceeds of the notes offerings have funded, and the proceeds from our commercial paper and/or our credit facility are expected to fund, a net cash transfer of approximately $701 million to ITT, with the balance to be used for general corporate purposes. See “Description of Material Indebtedness.”
 
Conditions to the Spin-Off
 
We expect that the spin-off will be effective as of 12:01 a.m., New York time, on October 31, 2011, the distribution date, provided that the following conditions shall have been satisfied or waived by ITT:
 
  •  our Registration Statement on Form 10, of which this Information Statement forms a part, shall have been declared effective by the Securities and Exchange Commission (the “SEC”), no stop order suspending the effectiveness thereof shall be in effect, no proceedings for such purpose shall be pending before or threatened by the SEC, and this Information Statement shall have been mailed to the ITT shareholders;
 
  •  Exelis common stock shall have been approved for listing on the NYSE, subject to official notice of distribution;
 
  •  ITT shall have obtained an opinion from its tax counsel, in form and substance satisfactory to ITT, as to the satisfaction of certain requirements necessary for the distribution, together with certain related transactions, to qualify as a reorganization under Sections 355 and 368(a)(1)(D) of the Code upon which the IRS will not rule;
 
  •  ITT shall have obtained a private letter ruling from the Internal Revenue Service, in form and substance satisfactory to ITT, and such ruling shall remain in effect as of the distribution date, to the effect, among other things, that the distribution, together with certain related transactions, will qualify as a reorganization under Sections 355 and 368(a)(1)(D) of the Code;
 
  •  the Board of Directors of ITT shall have obtained opinions from a nationally recognized valuation firm, in form and substance satisfactory to ITT, with respect to the capital adequacy and solvency of each of ITT, Exelis and Xylem;
 
  •  ITT shall have obtained all government approvals and other consents necessary to consummate the distribution;
 
  •  no order, injunction or decree issued by any governmental entity of competent jurisdiction or other legal restraint or prohibition preventing the consummation of all or any portion of the distribution shall be pending, threatened, issued or in effect, and no other event outside the control of ITT shall have occurred or failed to occur that prevents the consummation of all or any portion of the distribution;
 
  •  no other events or developments shall have occurred or failed to occur that, in the judgment of the Board of Directors of ITT, would result in the distribution having a material adverse effect on ITT or its shareholders;


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  •  the financing transactions described in this Information Statement as having occurred prior to the distribution shall have been consummated on or prior to the distribution;
 
  •  the internal reorganization shall have been completed, except for such steps as ITT in its sole discretion shall have determined may be completed after the distribution date;
 
  •  ITT shall have taken all necessary action, in the judgment of the Board of Directors of ITT, to cause the Board of Directors of Exelis to consist of the individuals identified in this Information Statement as directors of Exelis;
 
  •  ITT shall have taken all necessary action, in the judgment of the Board of Directors of ITT, to cause the officers of Exelis to be the individuals identified as such in this Information Statement;
 
  •  ITT shall have caused all its employees and any employees of its subsidiaries (excluding any employees of any of Exelis and its subsidiaries after the internal reorganization (the “Exelis Group”)) to resign, effective as of the distribution date, from all positions as officers or directors of any member of the Exelis Group in which they serve, and Exelis shall have caused all its employees and any employees of its subsidiaries to resign, effective as of the distribution date, from all positions as officers or directors of any of ITT, Xylem or any of their respective subsidiaries after the internal reorganization, in which they serve;
 
  •  all necessary actions shall have been taken to adopt the form of amended and restated articles of incorporation and amended and restated by-laws filed by Exelis with the SEC as exhibits to the Registration Statement on Form 10, of which this Information Statement forms a part;
 
  •  in the event the distribution is for any reason postponed more than one hundred twenty days after the date of the Distribution Agreement, the Board of Directors of ITT shall have redetermined, as of such postponed distribution date, that the distribution satisfies the requirements of Indiana Business Corporation Law governing distributions;
 
  •  the Board of Directors of ITT shall have approved the distribution, which approval may be given or withheld at its absolute and sole discretion; and
 
  •  each of the Distribution Agreement, the Tax Matters Agreement, the Benefits and Compensation Matters Agreement, the Intellectual Property License Agreements, the Master Transition Services Agreement and the other ancillary agreements shall have been executed by each party.
 
Completion of the spin-off of Xylem will be subject to similar conditions as those listed above. The fulfillment of the foregoing conditions will not create any obligation on ITT’s part to effect the spin-off. We are not aware of any material federal, foreign or state regulatory requirements that must be complied with or any material approvals that must be obtained, other than compliance with SEC rules and regulations, the receipt of a private letter ruling from the Internal Revenue Service, approval for listing on the NYSE and the declaration of effectiveness of the Registration Statement on Form 10 by the SEC, in connection with the distribution. ITT has the right not to complete the spin-off if, at any time prior to the distribution, the Board of Directors of ITT determines, in its sole discretion, that the spin-off is not then in the best interests of ITT or its shareholders or other constituents, that a sale or other alternative is in the best interests of ITT or its shareholders or other constituents or that it is not advisable for Exelis to separate from ITT at that time.
 
Reason for Furnishing this Information Statement
 
This Information Statement is being furnished solely to provide information to ITT’s shareholders that are entitled to receive shares of our common stock in the spin-off. This Information Statement is not, and is not to be construed as, an inducement or encouragement to buy, hold or sell any of our securities. We believe that the information in this Information Statement is accurate as of the date set forth on the cover. Changes may occur after that date and neither ITT nor we undertake any obligation to update the information except in the normal course of our respective public disclosure obligations.


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TRADING MARKET
 
Market for Our Common Stock
 
There has been no public market for our common stock. An active trading market may not develop or may not be sustained. We anticipate that trading of our common stock will commence on a “when-issued” basis at least two trading days prior to the record date and continue through the distribution date. When-issued trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. When-issued trades generally settle within four trading days after the distribution date. If you own shares of ITT common stock at the close of business on the record date, you will be entitled to shares of our common stock (as well as shares of Xylem common stock) distributed pursuant to the spin-off. You may trade this entitlement to shares of our common stock, without the shares of ITT common stock you own, on the when-issued market. On the first trading day following the distribution date, any when-issued trading with respect to our common stock will end and “regular-way” trading will begin. We intend to list our common stock on the NYSE under the ticker symbol “XLS”. We will announce our when-issued trading symbol when and if it becomes available.
 
It is also anticipated that, at least two trading days prior to the record date and continuing up to and including the distribution date, there will be two markets in ITT common stock: a “regular-way” market and an “ex-distribution” market. Shares of ITT common stock that trade on the regular-way market will trade with an entitlement to shares of our common stock (as well as shares of Xylem common stock) distributed pursuant to the distribution. Shares that trade on the ex-distribution market will trade without an entitlement to shares of our common stock (as well as shares of Xylem common stock) distributed pursuant to the distribution. Therefore, if you sell shares of ITT common stock in the regular-way market up to and including the distribution date, you will be selling your right to receive shares of our common stock (as well as shares of Xylem common stock) in the distribution. However, if you own shares of ITT common stock at the close of business on the record date and sell those shares on the ex-distribution market up to and including the distribution date, you will still receive the shares of our common stock (as well as shares of Xylem common stock) that you would otherwise receive pursuant to the distribution. In addition, following the distribution, ITT will effect a 1-for-2 reverse stock split of ITT common stock. It is anticipated that the reverse stock split will also impact the trading price of shares of ITT common stock on the ex-distribution market.
 
We cannot predict the prices at which our common stock may trade before the spin-off on a “when-issued” basis or after the spin-off. Those prices will be determined by the marketplace. Prices at which trading in our common stock occurs may fluctuate significantly. Those prices may be influenced by many factors, including anticipated or actual fluctuations in our operating results or those of other companies in our industry, investor perception of our company and the defense technology industry, market fluctuations and general economic conditions. In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the performance of many stocks and that have often been unrelated or disproportionate to the operating performance of these companies. These are just some factors that may adversely affect the market price of our common stock. See “Risk Factors — Risks Relating to Our Common Stock.”
 
Transferability of Shares of Our Common Stock
 
On August 31, 2011, ITT had approximately 184 million shares of its common stock issued and outstanding. Based on this number, we expect that upon completion of the spin-off, we will have approximately 184 million shares of common stock issued and outstanding. The shares of our common stock that you will receive in the distribution will be freely transferable, unless you are considered an “affiliate” of ours under Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Persons who can be considered our affiliates after the spin-off generally include individuals or entities that directly, or indirectly through one or more intermediaries, control, are controlled by, or are under common control with us, and may include certain of our officers and directors. As of August 31, 2011, our directors and officers beneficially owned approximately 1,319,162 shares of ITT common stock. In addition, individuals who are affiliates of


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ITT on the distribution date may be deemed to be affiliates of ours. Our affiliates may sell shares of our common stock received in the distribution only:
 
  •  under a registration statement that the SEC has declared effective under the Securities Act; or
 
  •  under an exemption from registration under the Securities Act, such as the exemption afforded by Rule 144.
 
In general, under Rule 144 as currently in effect, an affiliate will be entitled to sell, within any three-month period commencing 90 days after the date that the registration statement, of which this Information Statement is a part, is declared effective, a number of shares of our common stock that does not exceed the greater of:
 
  •  1.0% of our common stock then outstanding; or
 
  •  the average weekly trading volume of our common stock on the NYSE during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.
 
Sales under Rule 144 are also subject to restrictions relating to manner of sale and the availability of current public information about us.
 
In the future, we may adopt new stock option and other equity-based compensation plans and issue options to purchase shares of our common stock and other stock-based awards. We currently expect to file a registration statement under the Securities Act to register shares to be issued under these stock plans. Shares issued pursuant to awards after the effective date of the registration statement, other than shares issued to affiliates, generally will be freely tradable without further registration under the Securities Act.
 
Except for our common stock distributed in the distribution, none of our equity securities will be outstanding immediately after the spin-off and there are no registration rights agreements existing with respect to our common stock.


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DIVIDEND POLICY
 
Following the distribution, we expect that initially Exelis will pay a dividend, although the timing, declaration, amount and payment of future dividends to our shareholders fall within the discretion of our Board of Directors and will depend on many factors, including our financial condition, results of operations and capital requirements, as well as applicable law, regulatory constraints, industry practice and other business considerations that Exelis’s Board of Directors considers relevant. In addition, the terms of the agreements governing our new debt or debt that we may incur in the future may limit or prohibit the payments of dividends. There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence the payment of dividends. There can also be no assurance that the combined annual dividends on ITT common stock, Xylem common stock and our common stock after the spin-off, if any, will be equal to the annual dividends on ITT common stock prior to the spin-off.


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CAPITALIZATION
 
The following table presents Exelis’s historical capitalization at June 30, 2011 and our pro forma capitalization at that date reflecting the spin-off and the related transactions and events described in the notes to our unaudited pro forma combined condensed balance sheet as if the spin-off and the related transactions and events, including our financing transaction, had occurred on June 30, 2011. The capitalization table below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Exelis’s historical combined financial statements, our unaudited pro forma condensed combined financial statements and the notes to those financial statements included in this Information Statement.
 
We are providing the capitalization table below for informational purposes only. It should not be construed to be indicative of our capitalization or financial condition had the spin-off and the related transactions and events been completed on the date assumed. The capitalization table below may not reflect the capitalization or financial condition that would have resulted had we been operating as a separate, independent entity at that date and is not necessarily indicative of our future capitalization or financial condition.
 
                 
    As of June 30, 2011  
    Historical     Pro Forma  
    (Unaudited)
 
    (In millions)  
 
Capitalization:
               
Liabilities
               
Debt
  $     $ 890  
Equity
               
Common stock ($0.01 par value)
          2  
Additional paid in capital
          2,391  
Parent company investment(1)
    2,654        
Accumulated other comprehensive loss
    (73 )     (1,151 )
                 
Total capitalization
  $ 2,581     $ 2,132  
                 
 
 
(1) Historically, cash received by us has been transferred to ITT, and ITT has funded our disbursement accounts on an as-needed basis. The net effect of transfers of cash to ITT cash management accounts is reflected in parent company investment in the combined balance sheets.


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SELECTED HISTORICAL CONDENSED COMBINED FINANCIAL AND OTHER DATA
 
The following table presents the selected historical condensed combined financial data for Exelis. The condensed combined statement of operations data for each of the years in the three-year period ended December 31, 2010 and the condensed combined balance sheet data as of December 31, 2010 and 2009 set forth below are derived from Exelis’s audited combined financial statements included in this Information Statement. The condensed combined financial data for the six months ended June 30, 2011 and 2010 are derived from Exelis’s unaudited condensed combined financial statements included in this Information Statement. The condensed combined statement of operations data for the two years ended December 31, 2007 and 2006 and the condensed combined balance sheet data as of December 31, 2008, 2007 and 2006 are derived from Exelis’s unaudited combined financial statements that are not included in this Information Statement. The unaudited combined financial statements have been prepared on the same basis as the audited combined financial statements and, in the opinion of our management, include all adjustments necessary for a fair presentation of the information set forth herein.
 
The selected historical condensed combined financial and other data presented below should be read in conjunction with Exelis’s combined financial statements and accompanying notes and “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Information Statement. Exelis’s condensed combined financial data may not be indicative of our future performance and do not necessarily reflect what our financial position and results of operations would have been had we been operating as an independent, publicly traded company during the periods presented, including changes that will occur in our operations and capitalization as a result of the spin-off from ITT. See “Unaudited Pro Forma Condensed Combined Financial Statements” for a further description of the anticipated changes.
 
                                                         
    As of and for
   
    Six Months Ended
  As of and for
    June 30   Year Ended December 31
    2011   2010   2010   2009   2008(a)   2007(a)   2006
    (In millions)
 
Results of Operations
                                                       
Revenue
  $ 2,829     $ 2,894     $ 5,891     $ 6,061     $ 6,072     $ 4,190     $ 3,659  
Operating income
    235       309       689       702       650       445       357  
Operating margin
    8.3 %     10.7 %     11.7 %     11.6 %     10.7 %     10.6 %     9.8 %
Income from continuing operations
    161       199       448       459       414       290       210  
Net income(b)
    161       205       587       469       421       290       210  
Financial Position
                                                       
Total assets
    4,403       4,467       4,295       4,498       4,530       4,596       2,160  
 
 
(a) In December 2007, we acquired EDO Corporation (EDO), which contributed to 2008 revenue growth of approximately 37.0% compared to 2007. Additionally, the EDO acquisition increased total assets by approximately $2 billion on the date of acquisition.
 
(b) Net income for the six months ended June 30, 2010 and the years ended December 31, 2010, 2009 and 2008 includes $6, $139, $10 and $7 of income from discontinued operations, net of taxes. During 2010, we sold CAS, Inc., a component of our Information and Technical Services segment. CAS was part of the EDO acquisition noted above in Footnote (a).


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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
 
The unaudited pro forma condensed combined financial statements of Exelis consist of unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2011 and for the fiscal year ended December 31, 2010, and an unaudited pro forma condensed combined balance sheet as of June 30, 2011. The unaudited pro forma condensed combined financial statements should be read in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical combined financial statements included in this Information Statement.
 
The unaudited pro forma condensed combined financial statements have been derived from our historical combined financial statements included in this Information Statement and are not intended to be a complete presentation of our financial position or results of operations had the transactions contemplated by the Distribution Agreement and related agreements occurred as of and for the periods indicated. In addition, they are provided for illustrative and informational purposes only and are not necessarily indicative of our future results of operations or financial condition as an independent, publicly traded company. The pro forma adjustments are based upon available information and assumptions that management believes are reasonable, that reflect the expected impacts of events directly attributable to the distribution and related transaction agreements, and that are factually supportable and for purposes of the statements of operations, are expected to have a continuing impact on us. However, such adjustments are subject to change based on the finalization of the terms of the distribution and related transaction agreements.
 
The unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2011 and fiscal year ended December 31, 2010 reflect our results as if the separation and related transactions described below had occurred as of January 1, 2010. The unaudited pro forma condensed combined balance sheet as of June 30, 2011 reflects our results as if the separation and related transactions described below had occurred as of such date.
 
The unaudited pro forma condensed combined financial statements give effect to the following:
 
  •  the contribution, pursuant to the Distribution Agreement, by ITT to us of all the assets and liabilities that comprise our business;
 
  •  the expected transfer, upon the spin-off, by ITT to us of other assets and liabilities that were not reflected in our historical combined financial statements. These assets and liabilities relate primarily to postretirement benefit plans for which we expect to become the plans’ sponsor upon completion of the spin-off;
 
  •  our anticipated post-separation capital structure, including (i) the issuance of up to approximately 184 million shares of our common stock to holders of ITT common shares (this number of shares is based upon the number of ITT common shares outstanding on June 30, 2011 and an assumed distribution ratio of one share of Exelis common stock for each ITT common share); and (ii) the incurrence of $890 million of indebtedness and the making of the $701 million Contribution.
 
  •  the impact of, and transactions contemplated by, a Tax Matters Agreement between us and ITT and the provisions contained therein; and
 
  •  settlement of intercompany account balances between us and ITT.
 
The operating expenses reported in our carve-out historical combined statements of operations include allocations of certain ITT costs. These costs include allocation of ITT corporate costs, shared services, and other SG&A and non-SG&A related costs that benefit us. As a stand-alone public company, we do not expect our recurring costs to be materially higher than the expenses historically allocated to us from ITT.
 
We currently estimate costs that we will incur during our transition to being a stand-alone public company to range from approximately $15 million to $20 million. We have not adjusted the accompanying unaudited pro forma condensed combined statements of operations for these estimated costs as the costs are not expected


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to have an ongoing impact on our operating results. We anticipate that substantially all of these costs will be incurred within 18 months of the distribution. These costs primarily relate to the following:
 
  •  accounting, tax and other professional costs pertaining to our separation and established us as a stand-alone public company;
 
  •  compensation, such as modifications to certain bonus awards, upon completion of the separation;
 
  •  relocation costs;
 
  •  recruiting and relocation costs associated with hiring key senior management personnel new to our company;
 
  •  costs related to establishing our new brand in the marketplace; and
 
  •  costs to separate information systems.
 
Due to the scope and complexity of these activities, the amount of these costs could increase or decrease materially and the timing of incurrence could change.


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PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2011
 
                                 
                      Pro-Forma
 
                      for the
 
                Separation
    Financing
 
          Financing
    and Other
    and the
 
    Historical(a)     Adjustments     Adjustments     Separation  
    (In millions, except per share amounts)  
 
Revenue
  $ 2,829     $        $       $ 2,829  
Cost of revenue
    2,262                       2,262  
Selling, general and administrative expenses
    279               (14 )(b)     265  
Research and development expenses
    48                       48  
Restructuring charges, net
    5                       5  
                                 
Operating income
    235               14       249  
Interest expense
          (19 )(c)             (19 )
Miscellaneous income, net
    14                       14  
                                 
Income (loss) from continuing operations before income tax expense
    249       (19 )     14       244  
Income tax expense (benefit)
    88       (7 )(d)     5 (d)     86  
                                 
Income (loss) from continuing operations
  $ 161     $ (12 )   $ 9     $ 158  
                                 
Basic earnings per share:
                          $ 0.86 (k)
Diluted earnings per share:
                          $ 0.85 (l)
Weighted average number of shares outstanding:
                               
Basic
                            184 (k)
Diluted
                            185 (l)


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PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 2010
 
                         
                Pro- Forma
 
          Financing
    for the
 
    Historical(a)     Adjustments     Financing  
    (In millions, except per share amounts)  
 
Revenue
  $ 5,891     $  —     $ 5,891  
Cost of revenue
    4,523             4,523  
Selling, general and administrative expenses
    525             525  
Research and development expenses
    119             119  
Restructuring charges, net
    35             35  
                         
Operating income
    689               689  
Interest expense
          (38 )(c)     (38 )
Miscellaneous income, net
    7             7  
                         
Income (loss) from continuing operations before income tax expense
    696       (38 )     658  
Income tax expense (benefit)
    248       (14 )(d)     234  
                         
Income (loss) from continuing operations
  $ 448     $ (24 )   $ 424  
                         
Basic earnings per share:
                  $ 2.32 (k)
Diluted earnings per share:
                  $ 2.32 (l)
Weighted average number of shares outstanding:
                       
Basic
                    183 (k)
Diluted
                    183 (l)


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PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2011
 
                                 
                      Pro Forma
 
                      for the
 
                Separation
    Financing
 
    Historical
    Financing
    and Other
    and the
 
    (a)     Adjustments     Adjustments     Separation  
    (In millions)  
 
ASSETS
Current assets:
                               
Cash and cash equivalents
  $ 20     $ 881 (e)   $ (701 )(g)   $ 200  
Receivables, net
    1,022                   1,022  
Inventories, net
    293                   293  
Deferred tax asset
    121             19 (f)     140  
Other current assets
    50             3 (f)     53  
                                 
Total current assets
    1,506       881       (679 )     1,708  
                                 
Plant, property and equipment, net
    447             5 (f)     452  
Deferred income taxes
                379 (f)     181  
                      (198 )(j)        
Goodwill
    2,154                   2,154  
Other intangible assets, net
    236                   236  
Other non-current assets
    60       9 (e)     61 (f)     130  
                                 
Total non-current assets
    2,897       9       247       3,153  
                                 
Total assets
  $ 4,403     $ 890     $ (432 )   $ 4,861  
                                 
LIABILITIES AND EQUITY
Current liabilities:
                               
Accounts payable
  $ 412     $     $ 9 (f)   $ 421  
Advance payments and billings in excess of cost
    434                     434  
Compensation and other employee benefits
    217             4 (f)     221  
Other accrued liabilities
    244             38 (f)     282  
Current portion of long-term debt
          240 (e)             240  
                                 
                                 
Total current liabilities
    1,307       240       51       1,598  
                                 
Postretirement benefits
    190             1,070 (f)     1,260  
Deferred income tax liability
    198             (198 )(i)      
Long-term obligations, less current portion
          650 (e)             650  
Other non-current liabilities
    127             18 (f)     111  
                      (34 )(h)        
                                 
Total non-current liabilities
    515       650       856       2,021  
                                 
Total liabilities
    1,822       890       907       3,619  
                                 
Equity:
                               
Common stock
                  2 (i)     2  
Additional paid in capital
                  2,391 (i)     2,391  
Parent company investment
    2,654               406 (f)      
                      (701 )(g)        
                      34 (h)        
                      (2,393 )(i)        
Accumulated other comprehensive loss
    (73 )             (1,078 )(f)     (1,151 )
                                 
Total equity
    2,581               (1,339 )     1,242  
                                 
Total liabilities and equity
  $ 4,403     $ 890     $ (432 )   $ 4,861  
                                 


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NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
 
(a) Our historical combined financial statements reflect the historical financial position and results of operations of the Defense and Information Solutions segment of ITT, and do not reflect the impact of assets and liabilities that will be contributed to us by ITT in the spin-off and that are discussed separately in footnote (f).
 
(b) Reflects the removal of separation costs directly related to the spin-off transaction that were incurred during the historical period. These costs were primarily for tax, accounting, and other professional fees.
 
(c) The adjustment of $19 million and $38 million in the six months ended June 30, 2011 and the fiscal year ended December 31, 2010, respectively, represents interest expense and amortization of debt issuance costs in connection with debt securities described in footnote (e) below. The pro forma impact was based on the incurrence of $890 million of indebtedness issued with an assumed weighted average interest rate of 4.13%, and a weighted average life of approximately 7 years. We expect to capitalize debt issuance costs of approximately $9 million in connection with these debt arrangements.
 
A 1/8% variance in the assumed interest rate on the new debt securities would change annual interest expense by $1 million.
 
(d) The provision for income taxes reflected in our historical financial statements was determined as if Exelis filed a separate, stand-alone consolidated income tax return. The pro forma adjustments were determined using the statutory tax rate in effect in the respective tax jurisdictions during the periods presented.
 
(e) Reflects the incurrence of $890 million of indebtedness, net of debt issuance costs of $10 million. The $890 million of indebtedness consist of $400 million 5.550% senior notes due in 2021 and $250 million 4.250% senior notes due 2016, and $240 million of commercial paper and/or to be drawn under our credit facility. The target debt balance at the time of separation was determined by senior management based on a review of a number of factors including credit ratings consideration, forecast liquidity and capital requirements, expected operating results, and general economic conditions. Cash on hand following the spin-off transaction is expected to be used for general corporate purposes.
 
(f) Reflects the impact of assets and liabilities that are expected to be contributed to us by ITT, primarily related to postretirement benefit plans and associated deferred tax positions. Effective as of the distribution date, ITT expects to transfer to Exelis certain defined benefit pension and other postretirement benefit plans, most significantly the ITT Salaried Retirement Plan, and Exelis expects to assume all liabilities and assets associated with such plans and become the plans’ sponsor. The net liabilities associated with such plans expected to be assumed by Exelis are approximately $1,059 million excluding net deferred tax assets of $393 million. We estimate that every 25 basis point change in the discount rate impacts the funded status of the U.S. Salaried Pension Plan by approximately $118 million. Similarly, every five percentage point change in the actual 2011 rate of return on assets impacts the same plan by approximately $187 million.
 
(g) Reflects the Contribution to ITT of $701 million based upon the anticipated post-separation capital structure.
 
(h) Reflects an adjustment to other non-current liabilities of $34 million comprising contingent tax liabilities related to unresolved tax matters that will be retained by ITT in connection with the separation as set forth in the Tax Matters Agreement that will be entered into with ITT. Additionally, there will be certain indemnifications extended between ITT and us in accordance with the terms of the Tax Matters Agreement. At the time of separation, we will record a liability necessary to recognize the fair value of such indemnifications. The pro forma adjustment does not include such liability. We are currently in the process of determining the impact, if any, on the amount of the liability currently recorded.
 
(i) Represents the reclassification of ITT’s net investment in us, which was recorded in parent company equity, into additional paid-in-capital and the balancing entry to reflect the par value of approximately 184 million outstanding shares of common stock at a par value of $0.01 per share. We have assumed the number of outstanding shares of common stock based on the number of ITT common shares outstanding at June 30, 2011, which would result in approximately 184 million shares being distributed to holders of


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ITT common shares, at an assumed distribution ratio of one share of Exelis common stock for each ITT common share.
 
(j) Represents the reclassification of deferred tax liabilities to reflect our net deferred tax asset position.
 
(k) Pro forma basic earnings per share and pro forma weighted-average basic shares outstanding are based on the number of ITT common shares outstanding on June 30, 2011 and December 31, 2010, respectively, adjusted for an assumed distribution ratio of one share of Exelis common stock for each ITT common share.
 
(l) Pro forma diluted earnings per share and pro forma weighted-average diluted shares outstanding reflect potential common shares from ITT equity plans in which our employees participate based on the distribution ratio. While the actual impact on a go-forward basis will depend on various factors, including employees who may change employment from one company to another, we believe the estimate yields a reasonable approximation of the future dilutive impact of Exelis equity plans.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
You should read the following discussion of our results of operations and financial condition together with the audited historical combined financial statements, the unaudited interim condensed combined financial statements and the notes thereto included in this Information Statement as well as the discussion in the section of this Information Statement entitled “Business.” This discussion contains 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 due to a number of factors, including those discussed in the sections of this Information Statement entitled “Risk Factors” and “Special Note About Forward-Looking Statements.”
 
The combined financial statements and the interim condensed combined financial statements, which are discussed below, reflect the historical condition, results of operations and cash flows of Exelis. The financial information discussed below and included in this Information Statement, however, may not necessarily reflect what our financial condition, results of operations or cash flow would have been had we been a standalone company during the periods presented or what our financial condition, results of operations and cash flows may be in the future.
 
Except as otherwise indicated or unless the context otherwise requires, the information included in this discussion and analysis assumes the completion of all the transactions referred to in this Information Statement in connection with the separation and distribution. Unless the context otherwise requires, references in this Information Statement to “Exelis,” “we,” “us,” “our” and “our company” refer to Exelis Inc. and its combined subsidiaries. References in this information statement to “ITT” or “parent” refer to ITT Corporation, an Indiana corporation, and its consolidated subsidiaries, unless the context otherwise requires. Amounts are in millions unless stated otherwise.
 
Separation from ITT Corporation
 
On January 12, 2011, ITT Corporation (ITT) announced a plan to separate its Defense and Information Solutions (D&IS) segment from the remainder of its businesses through a pro rata distribution of common stock of an entity holding the assets and liabilities associated with the Defense and Information Solutions segment. We were incorporated in Indiana on May 4, 2011 to be the entity to hold such businesses and subject to approval by the Board of Directors of ITT and other conditions described below.
 
The combined financial statements presented herein, and discussed below, have been prepared on a stand-alone basis and are derived from the consolidated financial statements and accounting records of the Defense and Information Solutions business of ITT. The combined financial statements reflect our financial position, results of operations and cash flows as we were historically managed, in conformity with accounting principles generally accepted in the United States of America or GAAP.
 
The distribution of our common stock to ITT shareholders is conditioned on, among other things, final approval of the distribution plan by the ITT Board of Directors; the receipt of a private letter ruling from the Internal Revenue Service, or IRS, substantially to the effect that, among other things, the contribution by ITT of the assets and liabilities of its Defense and Information Solutions segment to Exelis, or the contribution, and the distribution will qualify as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355(a) and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended, or the Code; the receipt of a legal opinion as to the satisfaction of certain requirements necessary for the contribution and the distribution to qualify as a transaction that is described in Sections 355(a) and 368(a)(1)(D) of the Code upon which the IRS will not rule; the U.S. Securities and Exchange Commission, or the SEC, declaring effective our Registration Statement on Form 10.
 
We intend to enter into a Master Transition Services Agreement with ITT and Xylem, under which each of ITT and Xylem or their respective affiliates will provide us with certain services, and we or certain of our affiliates will provide each of ITT and Xylem certain services, for a limited time to help ensure an orderly


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transition for each of Exelis, ITT and Xylem following the distribution. We anticipate that under the Master Transition Services Agreement, Exelis will receive certain services (including information technology, financial, procurement and human resource services, benefits support services and other specified services) from ITT and Xylem, and Exelis will provide certain services (including information technology, human resources services and other specified services) to ITT and/or Xylem. We expect these services will be initially provided at cost with scheduled, escalating increases to up to cost plus 10% and are planned to extend for a period of 3 to 24 months in most circumstances. As these costs have been historically included in our operating results through allocations from ITT, we do not expect the costs associated with this transaction services agreement to materially affect our results of operations or cash flows after becoming a standalone company.
 
Subsequent to the distribution, we expect to incur one-time expenditures primarily consisting of employee-related costs, costs to start up certain stand-alone functions and information technology systems, and other one-time transaction related costs. Additionally, we will incur increased costs as a result of becoming an independent publicly-traded company, primarily from higher charges than in the past from ITT for establishing or expanding the corporate support for our businesses, including information technology, human resources, treasury, tax, risk management, accounting and financial reporting, investor relations, governance legal, procurement and other services and from transition services. We believe our cash flow from operations will be sufficient to fund these additional corporate expenses.
 
Executive Summary
 
Our business is organized into two segments, C4ISR Electronics and Systems (C4ISR) and Information and Technical Services (I&TS). Through our C4ISR Electronics and Systems segment we provide communications, sensing and surveillance, space and advanced engineering related products and systems for government and commercial customers around the world. Through our Information and Technical Services segment we provide 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. We participate in many high priority defense technology programs in the United States and abroad. We conduct most of our business with the U.S. Government, principally the Department of Defense (DoD).
 
Exelis reported revenue of $2.83 billion for the six months ended June 30, 2011, a decrease of approximately 2.2% from $2.89 billion reported in the same prior period in 2010. The decline in revenue was primarily driven by lower demand in our counter improvised explosive device (CIED) and Single Channel Ground and Airborne Radio System (SINCGARS) product lines, which had higher volumes in prior years due to the compelling need of the war fighter. The decline in C4ISR was partially offset by growth in our I&TS segment, which experienced approximately 26% growth from the same period in the prior year. Operating income for the six months ended June 30, 2011, was $235, reflecting a decline of $74 or 23.9% compared to the same prior period in 2010. Overall operating margin has declined year over year due to a shift in sales from higher margin products to lower margin services, which is in line with our longer term expectation for the business.
 
Company highlights for the first six months of 2011 included the following:
 
  •  The I&TS business benefited from options and extensions exercised by the Army Prepositioned Stock (APS-5) Kuwait, K-BOSSS and SCNS service contracts.
 
  •  A strategic win in the C4ISR business resulted in an international contract to supply the South Korean government with a towed minesweeping system, and sustained program performance secured our position as a provider of GPS satellite payloads via the GPSIII program.
 
  •  Total backlog expanded by $400 to $11.90 billion as it benefited from strong demand in the I&TS business. See “Business — Backlog.”
 
Exelis reported revenue of $5.89 billion for the year ended December 31, 2010, a decrease of approximately 3% from $6.1 billion reported in 2009. Declines were primarily driven by lower demand in our CIED and SINCGARS product lines, which had higher volumes in prior years due to the compelling need of


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the war fighter. Despite lower revenues on these higher margin products, operating margin on income of $689 remained relatively consistent with the prior year at 11.7%. The operating margin sustainment resulted from improved program execution, strategic realignment of the businesses, and productivity savings generated by initiatives taken over the past two years.
 
Company highlights for 2010 included the following:
 
  •  Executed a strategic realignment that created greater efficiencies and better alignment of our technical capabilities with our customers’ needs. Additionally, we completed the divestiture of CAS, our Systems Engineering and Technical Assistance (SETA) business, which generated proceeds of $237 and an after-tax gain on sale of $130.
 
  •  Positions secured in the I&TS segment on a number of significant U.S. Government programs, including the FAA Systems Engineering 2020 (SE2020) support contract, the NASA Space Communications Network Services and Kuwait Base Operations & Security Support Services (KBOSSS) contract, and the Army Corps of Engineers Middle East District to provide facilities operations, maintenance and training services for the Afghanistan National Security Forces.
 
  •  The C4ISR business won additional contracts for satellite imagers as part of the EnhancedView contract with Digital Globe and GeoEye. It also received a new award to expand the applicability of one of our airborne electronic countermeasures product lines (ALQ-214) currently on F-18 E/F to include previous revisions of the F-18 C/D.
 
Further details related to these results are contained in the Discussion of Financial Results sections.
 
Key Performance Indicators and Non-GAAP Measures
 
Management reviews key performance indicators including revenue, segment operating income and margins, orders growth, and backlog, among other 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 measures, which may not be comparable to similarly titled measures reported by other companies, to be key performance indicators:
 
  •  “adjusted income from continuing operations” defined as income from continuing operations, adjusted to exclude items that include, but are not limited to significant charges or credits that impact current results, but not related to our ongoing operations, unusual and infrequent non-operating items and non-operating tax settlements or adjustments. A reconciliation of adjusted income from continuing operations is provided below.
 
                                         
          Years Ended
 
    Six Months Ended     December 31,  
    June 30, 2011     June 30, 2010     2010     2009     2008  
 
Income from continuing operations
  $ 161     $ 199     $ 448     $ 459     $ 414  
Separation costs, net of tax
    9                          
                                         
Adjusted income from continuing operations
  $ 170     $ 199     $ 448     $ 459     $ 414  
                                         


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Known Trends and Uncertainties
 
Economic Opportunities, Challenges, and Risks
 
The U.S. continues to face a complex and changing national security environment, and domestic economic challenges, such as unemployment, federal budget deficits and the growing national debt. The U.S. Government’s investment in capabilities that respond to our evolving security threats is considered along with other spending priorities and domestic economic and fiscal challenges. We believe that the U.S. Government will continue to place a high priority on defense spending and national security, as well as economic challenges, and will continue to invest in sophisticated systems providing long-range surveillance and intelligence, battle management, precision strike, and strategic agility.
 
The U.S. Government faces the additional challenge of recapitalizing equipment and rebuilding readiness while also pursuing modernization and reducing overhead and inefficiency. The DoD has announced several initiatives to improve efficiency, refocus priorities and enhance DoD business practices including those used to procure goods and services from defense contractors.
 
These DoD initiatives are organized into five major areas: affordability and cost growth; productivity and innovation; competition; services acquisition; and processes and bureaucracy. Initial plans resulting from these initiatives were announced in early 2010 and the DoD has said it expects that these initiatives will generate $100 billion in savings. On January 6, 2011, Secretary Gates provided initial details on fiscal year 2012 defense budget and programmatic plans, and elaborated on the allocation of the $100 billion in expected savings from efficiency initiatives. The Secretary described plans to allocate $28 billion for increased operating costs and $70 billion for investment in high priority capabilities. In addition to the efficiency savings, the DoD has said it plans to reduce defense spending from its prior plans by $78 billion over the next five fiscal years.
 
On April 15, 2011, President Obama signed into law a budget for fiscal year 2011. The Congressional Budget Office estimates the budget deal trims $38 billion relative to fiscal year 2010 spending levels. This provides a budget for the DoD of $671 billion for fiscal year 2011. This is approximately $4 billion more than the actual fiscal year 2010 DoD budget of $667 billion. However, it is about $17 billion less than the $688 billion in the President’s fiscal year 2011 budget request. Total non-security discretionary spending for fiscal year 2011 will be about $42 billion less than in 2010 with the Departments of Housing and Transportation as well as Commerce, Justice and Science taking the bulk of the reductions.
 
Although reductions to certain programs in which we participate or for which we expect to compete are always possible, we believe that spending on recapitalization, modernization and maintenance of defense and homeland security assets will continue to be a national priority. Future defense spending is expected to include the development and procurement of new manned and unmanned military platforms and systems along with advanced electronics and software to enhance the capabilities of individual systems and provide for the real-time integration of individual surveillance, information management, strike, and battle management platforms. Given the current era of irregular warfare, we expect an increase in investment in persistent awareness with intelligence, surveillance and reconnaissance (ISR) systems, cyber warfare, and expansion of information available for the war fighter to make timely decisions. Other significant new competitive opportunities are expected to include long range strike, directed energy applications, missile defense, satellite communications systems, restricted programs, cybersecurity, technical services and information technology contracts, as well as international and homeland security programs. The risk of tighter defense budgets has not had a material impact on our current operations. The proposed cuts are future oriented and the budget passed by the U.S. Congress for the 2011 fiscal year did not materially impact our current operations.
 
The Budget Control Act of 2011 includes provisions which, if fully enacted, could materially reduce DoD spending over ten years compared to previous spending projections. Although details have yet to be provided on where “security” category savings will be found from the Budget Control Act of 2011, or what portion of these savings will be required from DoD, we expect increased uncertainty and lower top-line DoD spending over the next several years. However, we believe that the impact on 2012 fiscal year budgets will be marginal, and that current Appropriations Committee markups to the President’s 2012 budget are expected to pass without much further modification. We expect the majority of cuts to be allocated to the latter half of the ten-


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year period over which the cuts are supposed to be made. The cuts may include force structure reductions as well as investment account (that is, procurement and research and development) savings. It is difficult to estimate whether any cuts enacted may have a material impact on our business until more information is provided by the government on which forces and programs are to be targeted, or are most likely to be targeted, for spending cuts.
 
The fiscal year 2012 U.S. Department of Defense (DoD) budget was submitted to Congress by President Obama, but remains under deliberation. The administration’s spending and programmatic priorities detailed in the DoD budget request and aligned with the 2010 Quadrennial Defense Review, include investments of an enduring nature and focus on the future challenges of modernization and transformation of forces and capabilities. Examples include intelligence, surveillance and reconnaissance, network communications, cyber warfare and security, unmanned aircraft and integrated logistics support. Our portfolio of defense solutions, which covers a broad range of air, sea and ground platforms and applications, aligns with the priorities outlined by the DoD. However, uncertainty related to potential changes in appropriations and priorities could materially impact our business.
 
Programs related specifically to the support of ongoing operations in Iraq and Afghanistan face declining revenue streams going forward. This expectation is reflected in our business plans. The degree to which a reduction in these activities accelerates or not remains an area of uncertainty. There has been particular uncertainty around the U.S. administration’s earlier statements and intentions regarding reducing troop level presence in Afghanistan beginning in mid-2011.
 
Ongoing Department of Defense acquisition reform and Secretary Gates’ cost savings initiatives, combined with increased industry competitiveness to win long-term positions on key programs, could add pressure to industry sales levels and profit margins going forward.
 
The Company currently anticipates a range of $15 to $20 associated with the planned spin-off transaction primarily consisting of employee-related costs, costs to start up certain stand alone functions and information technology systems and other one-time transaction-related costs.
 
Recent Developments in U.S. Cost Accounting Standards (CAS) Pension Recovery Rules
 
On May 10, 2010, the U.S. Government CAS Board published a Notice of Proposed Rulemaking (NPRM) that, if adopted, would provide a framework to partially harmonize the CAS rules with the Pension Protection Act of 2006 (PPA) funding requirements. The NPRM would harmonize by partially mitigating the mismatch between CAS costs and PPA-amended ERISA minimum funding requirements. The NPRM results in an acceleration of allowable CAS pension costs over the next five years as compared with our current CAS pension costs. Until the final rule is published, and to the extent that the final rule does not completely eliminate mismatches between ERISA funding requirements and CAS pension costs, government contractors maintaining defined benefit pension plans will continue to experience a timing mismatch between required contributions and pension expenses recoverable under CAS. The CAS Board is expected to issue a final rule prior to year-end 2011. Depending on the effective date, the final rule will likely apply to our contracts starting in 2012. We anticipate that government contractors will be entitled to an equitable adjustment for any additional CAS contract costs resulting from the final rule.
 
The information provided above represents a list of known trends and uncertainties that could impact our business in the foreseeable future. It should, however, be considered along with the risk factors identified under the caption “Risk Factors” and the matters identified under the caption “Special Note About Forward-Looking Statements” in this Information Statement.


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DISCUSSION OF FINANCIAL RESULTS
 
Combined Operating Results
 
Selected financial highlights are presented in the table below:
 
                                                 
    Six Months Ended
                   
    June 30,           Year Ended December 31,        
    2011     2010     Change     2010     2009     Change  
    (Unaudited)                          
 
Product and service revenue
  $ 2,829     $ 2,894       (2.2 )%   $ 5,891     $ 6,061       (2.8 )%
Cost of product and service revenue
    2,262       2,244       0.8 %     4,523       4,630       (2.3 )%
Operating expenses
    332       341       (2.6 )%     679       729       (6.9 )%
Operating income
    235       309       (23.9 )%     689       702       (1.9 )%
Operating margin
    8.3 %     10.7 %             11.7 %     11.6 %        
Miscellaneous income (expense), net
    14       (1 )             7       (2 )        
Income tax expense
    88       109       (19.3 )%     248       241       2.9 %
Effective tax rate
    35.3 %     35.4 %             35.6 %     34.4 %        
Income from continuing operations
    161       199       (19.6 )%     448       459       (2.4 )%
Income from discontinued operations, net of tax
          6               139       10          
                                                 
Net income
  $ 161     $ 205       (21.5 )%   $ 587     $ 469          
                                                 
 
Revenue
 
In the first half of 2011, revenue growth in the I&TS segment nearly offset declines in the C4ISR segment compared to the prior year. I&TS service year-to-date revenue grew by approximately 25.7%, or $301, compared to the prior year for a total of $1,474. The higher concentration of service revenue reflected in the 2011 year-to-date results are in line with longer term expectations for revenue mix.
 
The following table illustrates revenue for our segments for the six months ended June 30, 2011 and 2010 as well as the twelve months ended December 31, 2010 and 2009:
 
                                                 
    Six Months Ended
                   
    June 30,           Year Ended December 31,        
    2011     2010     Change     2010     2009     Change  
    (Unaudited)                          
 
C4ISR Electronics & Systems
  $ 1,368     $ 1,731       (21.0 )%   $ 3,608     $ 3,795       (4.9 )%
Information & Technical Services
    1,474       1,173       25.7 %     2,303       2,291       %
Eliminations
    (13 )     (10 )             (20 )     (25 )        
                                                 
Total
  $ 2,829     $ 2,894       (2.2 )%   $ 5,891     $ 6,061       (2.8 )%
                                                 
 
Comparison of six months ended June 30, 2011 to six months ended June 30, 2010
 
C4ISR Electronics and Systems revenue for the six months ended June 30, 2011 was $1,368, reflecting a decline of $363 or approximately 21.0%, as compared with the same period in 2010. The decrease is primarily due to $186 lower sales in Communications Systems and Force Protection Systems (CFPS) of CREW 2.1 special purpose jammers and $96 related to domestic SINCGARS. The CREW 2.1 program has reached maturity and we do not expect significant sales to occur under this program going forward. However, during the first quarter of 2011, we received a significant award for CREW 3.3, the next generation of CREW technology. The extent by which CREW 3.3 will replace the CREW 2.1 program is an area of uncertainty. Additionally, we experienced lower revenues from our space-based classified programs of $33, which was


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offset by growth in our GPS-III (Global Positioning Systems III) and OCX (Next Generation GPS Control) programs of $35.
 
Information and Technical Services revenue for the six months ended June 30, 2011, was $1,474, reflecting an increase of $301 or approximately 25.7%, as compared with the same period in 2010. The increase is primarily due to contract wins on our Middle Eastern Programs (MEP), namely K-BOSSS (Kuwait Base Operations and Security Support Services) and surge-related efforts for support of the U.S. Armed Services in Kuwait and Afghanistan. KBOSS provided revenue of $197, while the APS-5 Kuwait and Afghanistan efforts provided revenue of $245. The increase in revenue was partially offset by lower revenue on our GMASS (Global Maintenance and Supply Services) contract of approximately $121.
 
Orders received increased 34.8% or $674 to $2,609 during the six months ended June 30, 2011 as compared with the same period in 2010. The increase in funding awards was driven primarily by the APS-5 Kuwait, K-BOSSS and SCNS service contracts and a combination of international and domestic night vision goggle awards being the largest contributors. The overall increase was also supported by favorable comparisons in the air traffic management businesses which more than offset a decline in order input within the counter IED product line and SINCGARS.
 
Comparison of year ended December 31, 2010 to year ended December 31, 2009
 
C4ISR Electronics and Systems revenue was $3,608, reflecting a decline of $187 or approximately 4.9%, as compared with 2009. The decrease is primarily due to approximately $513 lower sales in our CFPS product lines related to volume declines in surge-related equipment, specifically CREW 2.1 electronic jammers and SINCGARS related to the urgent and compelling needs in past years. This decrease was partially offset by increased sales related to our special purpose electronic jammer equipment of approximately $201 and increased sales in our Integrated Structures (IS) programs of approximately $65. Additionally, we had higher sales related to our night vision goggles sold to U.S. allies.
 
Order activity related to CREW 2.1 and U.S. SINCGARS programs began receding in 2009 due to reduced U.S. troop deployment and programmatic timing. However, during 2010, we received key awards to develop the next generation of battlefield improvised explosive device detection, such as CREW 3.2 and 3.3. Additionally, we received orders totaling approximately $200 for the next two commercial imagining satellites within the EnhancedView program.
 
Information and Technical Services revenue was $2,303 which was consistent with the prior year’s revenue of $2,291, Logistical service, air-traffic management and international security program activities generated growth of approximately 8.4% during 2010. The strength in the logistical service portion of our business was assisted by activity under several key facilities management awards received in the second half of 2009 and during 2010, including Kuwait, Afghanistan and the Logistics Civil Augmentation Program (LOGCAP), among others. However, growth from these programs was offset by a similar decline in our involvement in the Data & Analysis Center for Software (DACS) program.
 
As noted in the “Executive Summary” section, during 2010, we secured positions on a number of significant U.S. Government service-related programs, including the FAA Systems Engineering 2020 (SE2020) support, the NASA Space Communications Network Services (SCNS) and the Kuwait and Afghanistan Base Operations & Security Support Services. These contracts have a maximum estimated potential value of approximately $4.9 billion with all options exercised. See below for further information:
 
SE2020 — this contract has been awarded by the FAA to lead a team of aviation industry companies to support the development of advanced concepts involving the most challenging issues facing the FAA’s Next Generation Air Transportation System initiative to modernize the U.S. national airspace system. This contract has a maximum estimated potential value with all options exercised of $1.4 billion, with a five-year base period and five one-year options.
 
Kuwait Facilities Operations — this contract has been awarded by the U.S. Army Rock Island Contracting Center to provide comprehensive support services for all U.S. Army facilities in Kuwait. This contract has a


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maximum estimated potential value with all options exercised of $1.4 billion, with a one-year base period and four one-year options.
 
SCNS — this contract was originally awarded in October 2008 to support NASA space and near-Earth networks that provide most of the communications and tracking services for a wide range of Earth-orbiting spacecraft, but commencement of the contract work was delayed due to a number of protests filed by the incumbent contractor. These protests were cleared during the fourth quarter of 2010. The contract has a base performance period of five years and three months, with two one-year option periods, and a maximum estimated potential value with all options exercised of $1.3 billion.
 
Afghanistan National Security Forces Facilities Support — this program award pertains to two individual contracts with the U.S. Army Corps of Engineers Middle East District to provide facilities operations, maintenance and training services for the Afghanistan National Security Forces in Northern Afghanistan and Southern Afghanistan. Each award is for a one-year base period with options for four additional years. The contract has an estimated potential value of $450 for Northern Afghanistan and $350 for Southern Afghanistan, with all options exercised.
 
Cost of Product and Service Revenue
 
Cost of product and service revenue, selling, general and administrative (SG&A) and internal research and development expenses are comprised of the following:
 
                                                 
    Six Months Ended
                   
    June 30,           Year Ended December 31,        
    2011     2010     Change     2010     2009     Change  
    (Unaudited)                          
 
Cost of product revenue
  $ 954     $ 1,216       (21.5 )%   $ 2,491     $ 2,629       (5.2 )%
% of product revenue
    69.7 %     70.2 %             69.0 %     69.3 %        
Cost of service revenue
    1,308       1,028       27.2 %     2,032       2,001       1.5 %
% of service revenue
    88.7 %     87.6 %             88.2 %     87.3 %        
Selling, general and administrative expensive
    279       264       5.7 %     525       582       (9.8 )%
% of total revenues
    9.9 %     9.1 %             9.0 %     9.6 %        
Research and development expenses
    48       58       (17.2 )%     119       142       (16.2 )%
% of total revenues
    1.7 %     2.0 %             2.0 %     2.3 %        
Restructuring and asset impairment charges, net
    5       19               35       5          
                                                 
Cost of product and service revenue
  $ 2,594     $ 2,585       0.3 %   $ 5,202     $ 5,359       (2.9 )%
                                                 
 
Comparison of six months ended June 30, 2011 to six months ended June 30, 2010
 
The decrease in cost of product revenue of $262 for the six months ended June 30, 2011 was primarily due to the lower sales noted above and productivity improvements in our C41SR Electronics and Systems segment.
 
The increase in cost of service revenue of $280 for the six months ended June 30, 2011 compared to the same period in 2010 was primarily due to higher revenue. The increase as a percent of service revenue of 110 basis points is primarily due to higher costs on newly initiated contracts as compared to the same period in the prior year.
 
Comparison of year ended December 31, 2010 to year ended December 31, 2009
 
Cost of product revenue in 2010 decreased $138, or 5.2% from 2009 primarily due to lower sales volume noted above.
 
Cost of services revenue in 2010 increased $31 or 1.5% from 2009 primarily due to the higher sales volume as noted above. The increase as a percentage of service revenue was primarily due to the mix of contracts during the year compared to 2009.


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Selling, General & Administrative Expenses
 
Comparison of six months ended June 30, 2011 to six months ended June 30, 2010
 
SG&A expenses as a percent of total revenue was 9.9% for the six months ended June 30, 2011 compared to 9.1% for the same period in 2010 primarily due to increases in spin-off related expenses and other SG&A expenses of approximately $15 and international marketing efforts of $2. This increase was partially offset by lower other intangible amortization of approximately $6 related to our 2007 acquisition of EDO Corporation.
 
Comparison of year ended December 31, 2010 to year ended December 31, 2009
 
SG&A expenses for 2010 decreased $57 versus 2009. SG&A expenses as a percentage of total revenue decreased from 9.6% in 2009 to 9.0% in 2010, primarily due to cost reductions realized from streamlining our organizational structure in 2010. Additionally, there was a year over year reduction in other intangible amortization expense of approximately $21 due to certain other intangible assets acquired in connection with our 2007 purchase of EDO becoming fully amortized in 2009.
 
Research and Development Expenses (R&D)
 
Comparison of six months ended June 30, 2011 to six months ended June 30, 2010
 
R&D expenses decreased by $10 in 2011 or approximately 17.2% compared to 2010, related to the completion of certain R&D projects for integrated electronic warfare systems and other communication technologies within our C4ISR Electronics and Systems segment.
 
Comparison of year ended December 31, 2010 to year ended December 31, 2009
 
R&D expenses decreased $23 in 2010 or approximately 16.2%, as compared with the same period in 2009. The decrease was primarily due to the completion of certain R&D projects for integrated electronic warfare systems and other communication technologies within our C4ISR Electronics and Systems segment.
 
Restructuring and Asset Impairment Charges, Net
 
Comparison of six months ended June 30, 2011 to six months ended June 30, 2010
 
During the first six months of 2011, we recognized net restructuring charges of $5 associated with headcount reductions within our C4ISR Electronics and Systems segment and Information and Technical Services segment. During the first six months of 2010, we recognized restructuring costs of $19 primarily related to an initiative to realign our organizational structure and reduce the number of business units. This action was substantially complete as of December 31, 2010. See Note 4, “Restructuring Charges,” in the Notes to the Condensed Combined Financial Statements for additional information.
 
Comparison of year ended December 31, 2010 to year ended December 31, 2009
 
During 2010, we recognized net restructuring charges of $35, representing a $30 increase as compared to the prior year. This increase in expense was mainly attributable to our initiative related to our segment realignment action with the objective of enabling better product portfolio integration, encouraging a more coordinated market approach and reducing operational redundancies and included the cost of employee separation and the cost relating to the closure of three manufacturing facilities. As of December 31, 2010, we consider this action to be substantially complete, except for remaining cash payments of $9 to settle remaining severance liabilities. See Note 5, “Restructuring and Impairment Charges,” in the Notes to the Combined Financial Statements for additional information.


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Operating Income
 
The following table illustrates the six months ended June 30, 2011 and 2010 as well as the 2010 and 2009 operating income results of our business segments, including operating margin results.
 
                                                 
    Six Months Ended
           
    June 30,       Year Ended December 31,    
    2011   2010   Change   2010   2009   Change
    (Unaudited)                
 
C4ISR Electronics & Systems
  $ 171     $ 237       (27.8 )%   $ 563     $ 563        
Operating margin
    12.5 %     13.7 %             15.6 %     14.8 %        
Information and Technical Services
    64       72       (11.1 )%     126       139       (9.4 )%
Operating margin
    4.3 %     6.1 %             5.5 %     6.1 %        
Total operating income
  $ 235     $ 309       (23.9 )%   $ 689     $ 702       (1.9 )%
Combined operating margin
    8.3 %     10.7 %             11.7 %     11.6 %        
 
Comparison of six months ended June 30, 2011 to six months ended June 30, 2010
 
Operating income at C4ISR Electronics and Systems for the six months ended June 30, 2011, decreased $66, or 27.8%, compared with the same period in 2010 and operating income as a percentage of revenue was 12.5%, compared to 13.7% for the same period in 2010. The decrease in operating margin was primarily driven by lower sales on surge related products partially offset by lower R&D of $9 and intangible amortization expense of $4 related to our 2007 acquisition of EDO Corporation.
 
Operating income at Information and Technical Services for the six months ended June 30, 2011, decreased $8 or 11.1%, compared with the same period in 2010 and operating income as a percentage of revenue was 4.3% compared to 6.1% for the same period in 2010. The lower operating margin was primarily due to unfavorable sales mix as compared to the same period in 2010.
 
As demand has changed from surge-related equipment such as CREW 2.1 and SINGGARS to increased volume in our operational services business on contracts such as K-BOSSS and the U.S. Armed Services contracts in Kuwait and Afghanistan, we expect the current margins to be more in line with longer term operating margin expectations.
 
Comparison of year ended December 31, 2010 to year ended December 31, 2009
 
Operating income at C4ISR Electronics and Systems of $563 in 2010 was consistent with the same period in 2009 and operating income as a percentage of revenue was 15.6%, compared to 14.8% for the same period in 2009. The increase in operating margin as a percentage of sales was primarily due to reduced selling, administrative and general expenses of approximately $57 and lower R&D expenses of approximately $23 as a result of our realignment activities and completion of some key electronic warfare and communications R&D projects and lower amortization of other intangibles of approximately $21. This was partially offset by additional restructuring expenses of approximately $30.
 
Operating income at Information and Technical Services in 2010 decreased $13 or 9.4% as compared with the same period in 2009 and operating income as a percentage of revenue was 5.5%, a decline from 6.1% for the same period in 2009. The decrease in operating income and margin is primarily due to an unfavorable mix shift towards lower margin base operations support services and incremental investments in selling, general and administrative expenses to support growth in Cyber, ATM and other service pursuits.
 
Impacts to Operating Income from Postretirement Expense
 
We recorded $7 of net periodic postretirement cost (pension and other employee-related defined benefit plans) during 2010, compared with costs of $12 in 2009.


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In 2011, we expect to incur approximately $10 of net periodic postretirement cost, representing an increase of $3, or 43% as compared to 2010. This increase is primarily attributable to additional amortization of net actuarial losses.
 
U.S. Government Cost Accounting Standards govern the extent to which postretirement costs and plan contributions are allocable to and recoverable under contracts with the U.S. Government. As a result, we have sought and expect to continue to seek reimbursement from the DoD for a portion of our postretirement costs and plan contributions.
 
Income Tax Expense
 
Comparison of six months ended June 30, 2011 to six months ended June 30, 2010
 
For the six month period ended June 30, 2011, the Company recorded an income tax provision from continuing operations of $88 or 35.3% of income before income taxes compared to $109 or 35.4% during the same prior year period. For both periods presented, the effective tax rate is slightly lower than the federal statutory rate of 35% due to favorable impacts from the U.S. manufacturing deduction and research and developmental credits substantially offset by the unfavorable impact of state taxes.
 
Comparison of year ended December 31, 2010 to year ended December 31, 2009
 
In 2010 and 2009, the Company recorded an income tax provision from continuing operations of $248 and $241, respectively, which represents effective tax rates of 35.6% and 34.4%, respectively. For 2010, the effective tax rate is slightly higher than the federal statutory rate of 35% due to unfavorable impacts of both state taxes and foreign earnings repatriation offset substantially by favorable impacts from the U.S. manufacturing deduction and research and developmental credits. For 2009, the effective tax rate is slightly lower than the federal statutory rate of 35% due to favorable impacts from the U.S. manufacturing deduction and research and developmental credits substantially offset by the unfavorable impact of state taxes.
 
Income From Discontinued Operations, Net of Tax
 
Income from discontinued operations, net of tax, was $139 for 2010, as compared to $10 for 2009. The increase of $130 primarily reflects the recognition of an after-tax gain on sale of $130 related to our divesture of CAS, Inc. (CAS), which was sold on September 8, 2010. CAS generated after-tax income from operations of $9 for both the 2009 twelve-month period and 2010 period prior to its sale.
 
Backlog
 
“Backlog” is segmented as “funded” which represents unfilled firm orders for which funding has been authorized and appropriated by the customer, and “unfunded” which represents firm orders and potential options on multi-year contracts, excluding protested awards and potential orders under indefinite delivery/indefinite quantity (IDIQ) contracts. A summary of historical backlog levels is provided below (in billions).
 
                         
    As of
             
    June 30,
    As of December 31,  
    2011     2010     2009  
 
Funded backlog
  $ 3.8     $ 4.1     $ 5.1  
Unfunded backlog
    8.1       7.4       4.9  
                         
Total backlog
  $ 11.9     $ 11.5     $ 10.0  
                         
 
On June 30, 2011, total backlog was $11.9 billion compared to $11.5 billion at the end of 2010. The increase relates to key contract wins for TAC-SWACAA (Total Army Communications Southwest Asia, Central Asia and Africa), APS-5, GPS III EMD (Engineering, Manufacturing and Design), and electronic warfare systems on the Special Operations Aircraft (SOA) contract, partially offset by lower order input for Night Vision goggles under Omni-7 contract and SINCGARS. Total backlog includes both funded backlog


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(firm orders for which funding is contractually obligated by the customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the customer), which represents firm orders and potential options on multi-year contracts, excluding protested awards and potential orders under indefinite delivery/indefinite quantity (IDIQ) contracts. Backlog is converted into revenue 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.
 
Discussion of Financial Results for Years ended December 31, 2009 and 2008
 
                         
    Year Ended December 31,        
    2009     2008     Change  
 
Total revenue
  $ 6,061     $ 6,072        
Cost of product and service revenue
    4,630       4,693       (1.3 )%
Operating expenses
    729       729        
Operating income
    702       650       8.0 %
Operating margin
    11.6 %     10.7 %        
Miscellaneous (expense) income, net
    (2 )     7          
Income tax expense
    241       243        
Effective tax rate
    34.4 %     37.0 %        
Income from continuing operations
    459       414       (10.9 )%
                         
Income from discontinued operations, net of tax
    10       7          
                         
Net income
  $ 469     $ 421          
                         
 
Revenue
 
                         
    Year Ended December 31,        
    2009     2008     Change  
 
C4ISR Electronics & Systems
  $ 3,795     $ 3,896       (2.6 )%
Information and Technical Services
    2,291       2,199       4.2 %
Eliminations
    (25 )     (23 )        
                         
Total revenue
  $ 6,061     $ 6,072          
                         
 
Comparison of year ended December 31, 2009 to year ended December 31, 2008
 
C4ISR Electronics and Systems revenue was $3,795, reflecting a decline of $101 or approximately 2.6%, as compared with 2008. The lower revenue was primarily due to volume declines in U.S. SINCGARS and CREW 2.1 of $174. In addition, our 2009 program revenue was adversely affected by our Transition Switch Module program of $72 which ended in 2008. The decline in revenue from these programs was partially offset by revenue growth from increased volume of night vision goggles sold to international customers of $40, Airborne Integrated Electronic warfare systems and radar systems of $78, as well as the GPS III program and other classified programs.
 
Information and Technical Services revenue was $2,291, reflecting an increase of $92 or approximately 4.2% as compared with 2008. The increased revenue was primarily due to logistical service contract wins at Fort Benning and Maxwell Air Force Base, as well as increased activity under the Global Maintenance and Supply Services (GMASS) agreement with the U.S. Army. In addition, revenue during 2009 benefited from an increase in engineering services related to the Tethered Aerostat Radar System (TARS) program and the Federal Aviation Administration’s (FAA) next generation air-traffic control program. These positive service


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revenue contributions were partially offset by a decline in Logistics Civil Augmentation Program (LOGCAP) revenues.
 
Cost of Product and Service Revenue
 
Cost of product and service revenue, selling, general and administrative and internal research and development expenses are comprised of the following:
 
                         
    Year Ended December 31,    
    2009   2008   Change
 
Cost of product revenue
  $ 2,629     $ 2,791       (5.8 )%
% of product revenue
    69.3 %     71.6 %        
Cost of service revenue
    2,001       1,902       5.2 %
% of service revenue
    87.3 %     86.5 %        
Selling, general & administrative
    582       605       (3.8 )%
% of total revenue
    9.6 %     10.0 %        
Research & development
    142       111       27.9 %
% of total revenue
    2.3 %     1.8 %        
Restructuring and asset impairment charges, net
    5       13          
                         
Cost of product and service revenue
  $ 5,359     $ 5,422       (1.2 )%
                         
 
Cost of product revenue in 2009 decreased $162, or 5.8% from 2008 primarily due to the lower revenue noted above, while amounts decreased as a percentage of product revenue from 71.6% to 69.3% due to productivity cost saving initiatives on our SINCGARS and Crew product lines and sourcing strategies.
 
Cost of services revenue in 2009 increased $99 or 5.2% from 2008 primarily due to the higher sales noted above. The slight increase as a percent of service revenue was mainly attributable to our program mix in our base operations and logistic services.
 
Selling, General & Administrative Expenses
 
SG&A expenses for 2009 decreased $23 from 10.0% in 2008 to 9.6% in 2009 as a percent of total revenue. The year-over-year decrease was primarily attributable to cost-saving initiatives in response to the declining defense market as well as restructuring savings recognized in 2009 from actions taken during 2008. These savings were partially offset by higher postretirement plan costs.
 
Research and Development Expenses
 
R&D expenses increased $31 during 2009 over the prior year, primarily due to increased spending for development materials on key growth platforms across our C4ISR Electronics and Systems segment.
 
Restructuring and Asset Impairment Charges, Net
 
During 2009, we recognized net restructuring charges of $5, representing a $8 decrease as compared to 2008. The charges associated with 2009 actions primarily represent severance costs for reductions in headcount associated with the lower production in 2009 as compared to 2008.
 
Operating Income
 
We generated operating income of $702 during 2009, an 8.0% increase from 2008. This was mainly attributable to benefits from the implementation of extensive cost-saving initiatives and productivity improvements, such as structural changes made to optimize our sourcing and reduce cycle times. Operating margin increased to 11.6% for 2009, a year-over-year increase of 90 basis points. This increase was mainly attributable to benefits from productivity improvements and various cost-saving initiatives. The following table


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illustrates the 2009 and 2008 operating income results of our business segments, including operating margin results.
 
                         
    Year Ended December 31,    
    2009   2008   Change
 
C4ISR
  $ 563     $ 501       12.4 %
Operating margin
    14.8 %     12.9 %        
Information & Technical Services
  $ 139     $ 149       (6.7 )%
Operating margin
    6.1 %     6.8 %        
Total operating income
  $ 702     $ 650       8.0 %
Combined operating margin
    11.6 %     10.7 %        
 
Operating income at C4ISR Electronics and Systems in 2009 increased $62 or 12.4% as compared with the same period in 2008 and operating income as a percentage of revenue was 14.8%, compared to 12.9% in the same period in 2008. The increase in operating margins is primarily due to cost-saving initiatives, such as productivity and sourcing strategies. These benefits were partially offset by increases in costs of materials, labor and other overhead and increased investments in R&D.
 
Operating income at Information and Technical Services in 2009 decreased $10 or 6.7% as compared with the same period in 2008 and operating income as a percentage of revenue was 6.1%, compared to 6.8% in the same period in 2008. The decrease in operating margin is primarily due to unfavorable program mix and the increased competitive environment in the services industry.
 
Impacts to Operating Income from Postretirement Expense
 
We recorded $12 of net periodic postretirement cost during 2009 and 2008.
 
Income Tax Expense
 
In 2009 and 2008, the Company recorded an income tax provision from continuing operations of $241 and $243, respectively, which represents effective tax rates of 34.4% and 37.0%, respectively. For 2009, the effective tax rate is slightly lower than the federal statutory rate of 35% due to favorable impacts from the U.S. manufacturing deduction and research and developmental credits substantially offset by the unfavorable impact of state taxes. For 2008, the effective tax rate is higher than the federal statutory rate of 35% due to the unfavorable impact of state taxes primarily offset by favorable impacts from the U.S. manufacturing deduction and research and developmental credits.
 
Income from Discontinued Operations, Net of Tax
 
Income from discontinued operations, net of tax, was $10 for 2009, as compared to $7 for 2008. During 2010 we classified CAS, a component of our Information and Technical Services segment, as a discontinued operation.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Current liquidity
 
Historically, we have generated operating cash flow sufficient to fund our working capital, capital expenditure and financing requirements. Subsequent to the separation, while our ability to forecast future cash flows is more limited, we expect to fund our ongoing working capital, capital expenditure and financing requirements through cash flows from operations via access to cash on hand and capital markets.
 
If our cash flows from operations are less than we expect, we may need to incur debt or issue equity. From time to time we may need to access the long-term and short-term capital markets to obtain financing. Although we believe that the arrangements in place at the time of the separation 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


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economy. We cannot assure that such financing will be available to us on acceptable terms or that such financing will be available at all.
 
At or prior to the distribution, we expect to have indebtedness in an amount of $890, which includes $650 of senior notes and $240 of commercial paper and/or to be drawn under our credit facility. The net proceeds of the notes offerings have funded, and the proceeds from our commercial paper and/or our credit facility are expected to fund, a net cash transfer of approximately $701 to ITT with the balance to be used for general corporate purposes. The notes consist of $400 aggregate principal amount of 5.550% senior notes that mature on October 1, 2021 and $250 aggregate principal amount of 4.250% senior notes that mature on October 1, 2016. The notes are our senior unsecured obligations and rank equally with all of our existing and future senior unsecured indebtedness. The notes are initially guaranteed on a senior unsecured basis by ITT. The ITT Guarantee will terminate upon the completion of the spin-off. See “Description of Material Indebtedness.”
 
The majority of our operations participate in U.S. and international cash management and funding arrangements managed by ITT where cash is swept from our balance sheet daily and cash to meet our operating and investing needs is provided as needed from ITT. Transfers of cash both to and from these arrangements are reflected as a component of “Parent company investment” within “Parent company equity” in the combined balance sheets. The cash presented on our balance sheet consists primarily of U.S. and international cash from subsidiaries who do not participate in these arrangements. The Company does not currently expect that it will be required to repatriate undistributed earnings of foreign subsidiaries.
 
Future liquidity
 
Our primary future cash needs will be centered on operating activities, working capital, capital expenditures, and strategic investments. Our ability to fund these needs will depend, in part, on our ability to generate or raise cash in the future, which is subject to general economic, financial, competitive, regulatory and other factors that are beyond our control. We expect to generate sufficient cash from operations to meet our liquidity and capital needs, subject to the expected financing transactions described below. For at least the next 12 months, we expect to generate sufficient cash from operations to meet our liquidity and capital needs, subject to the expected borrowing and net cash transfer to ITT described herein. Thereafter, we expect to have sufficient liquidity and capital resources arising from cash generated by the Company’s ongoing operations. Although cash generated from operations is expected to be sufficient to service our liquidity and capital needs, including existing and known or reasonably likely short and long-term cash requirements, we also expect to have access to a $600 million revolving line of credit, commercial paper and capital markets to accommodate timing differences in cash flows.
 
On or about the distribution date, a $600 million, four-year unsecured senior revolving credit facility (which includes a $100 million sublimit on letters of credit) will become effective. The interest rate for borrowings under the new credit facility is expected to be generally based on the London Interbank Offered Rate (LIBOR), plus a spread, based upon our debt rating. The senior revolving credit facility will replace, in part, the existing credit facility of ITT, and be used for working capital, capital expenditures and other general corporate purposes. The actual terms of the new credit facility, including interest rate, commitment, covenants and maturity, will depend on market conditions at the time we enter into the new credit facility.
 
Effective as of the distribution date, ITT expects to transfer to Exelis certain defined benefit pension and other post retirement benefit plans, including the ITT Salaried Retirement Plan, and Exelis expects to assume all liabilities and assets associated with such plans and become the plans’ sponsor. The net liabilities associated with such plans to be assumed by Exelis are approximately $1,059, excluding net deferred tax assets of $393.
 
Following our separation from ITT, our capital structure and sources of liquidity will change significantly. We will no longer participate in cash management and funding arrangements with ITT. Instead, our ability to fund our capital needs will depend on our ongoing ability to generate cash from operations, and access to the bank and capital markets. We believe that our future cash from operations together with our access to funds on hand and capital markets will provide adequate resources to fund our operating and financing needs.


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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.
 
Sources and Uses of Liquidity
 
Our principal source of liquidity is our cash flow generated from operating activities, which provides us with the ability to meet the majority of our short-term funding requirements. The following table provides net cash provided by operating activities and used in investing and financing activities for the six months ended June 30, 2011 and 2010 and for each of the previous three years.
 
                                         
    Six Months Ended June 30,     Year Ended December 31,  
    2011     2010     2010     2009     2008  
 
Operating Activities
  $ 216     $ 306     $ 641     $ 747     $ 557  
Investing Activities
    (24 )     (52 )     114       (120 )     (318 )
Financing Activities
    (190 )     (270 )     (775 )     (653 )     (289 )
Foreign Exchange
                            (12 )
                                         
Net cash flow from continuing operations
  $ 2     $ (16 )   $ (20 )   $ (26 )   $ (62 )
                                         
 
Net cash provided by operating activities decreased $90 for the six months ended June 30, 2011 compared to the same period in 2010, primarily due to a $44 decrease in net income and unfavorable changes related to other assets of $51 and accrued and deferred taxes of $29. These decreases were partially offset by a favorable change in working capital balances of $9 which consisted of, additional inventory purchases of $101 primarily within our C4ISR Electronics and Systems segment, increase in accounts receivable due to the timing of collections which increased by $21 and an increase in accounts payable of $131 primarily related to new service programs, including K-BOSSS and APS-5 which have yet to achieve specific billing milestones. These decreases were further offset by higher than expected advance payments on newly initiated contracts.
 
Net cash provided by operating activities decreased $106 in 2010 compared to 2009. This decrease is primarily due to an unfavorable 2010 impact of $87 from collections received in December 2009 related to certain advance payments and an increase in accounts receivable of $211. These decreases are partially offset by a decrease in inventory of $198.
 
Net cash provided by operating activities increased $190 in 2009 compared to 2008. This increase is primarily due to a $54 increase in net income excluding non-cash increases in depreciation and amortization, improvements in cash collections due to timing in the amount of $111 and favorable impact from cash advances from customers. These benefits were partially offset by an increase in tax payments of $60 and an increase in inventory.
 
Net cash used in investing activities decreased by $28 for the six months ended June 30, 2011 compared to the same period in 2010. This decrease was primarily due to higher capital investment spending in the prior year which was related to our ADS-B contract within our I&TS segment and the proceeds of $14 from the sale of a marketable security.
 
Net cash provided by investing activities increased by $234 in 2010 compared to 2009 related primarily to proceeds of $237 from the sale of CAS and $14 from the sale of other assets in 2010. Proceeds from the aforementioned sales were partially offset by investment spending of $29 related to our Creaso GmbH, Echostorm and SRA AOS group acquisitions.
 
Net cash used in investing activities decreased by $198 in 2009 compared to 2008, primarily related to a $225 decline in acquisition spending. This decline is due primarily to our 2008 payment of $226 related to EDO acquisition that carried over from 2007. This was partially offset by additional investments related to the construction of radio towers in support of our ADS-B program with the FAA and the implementation of an entity-wide ERP system.


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Changes in cash used in financing activities for the six months ended June 30, 2011 and 2010, and for each of the previous three years are due primarily to transfers to and from our parent, ITT. The components of net transfers include: (i) cash deposits from the Company to parent, (ii) cash borrowings parent used to fund operations, capital expenditures or acquisitions, (iii) charges (benefits) for income taxes, and (iv) allocations of parent’s corporate expenses described in Note 15, “Related Party Transactions and Parent Company Equity,” in the Notes to the Combined Financial Statements.
 
Funding of Pension Plans
 
At December 31, 2010, our pension plans were underfunded by $88. A substantial portion of the underfunded position arose during the fourth quarter of 2008, when we recognized a significant decline in the fair market value of our pension plan assets. Favorable market conditions during the latter half of 2009 and throughout 2010 resulted in an increase in the fair market value of our pension plan assets.
 
Funding requirements under IRS rules are a major consideration in making contributions to our U.S. pension plans. With respect to U.S. qualified pension plans, we intend to contribute annually not less than the minimum required by applicable law and regulations. In 2010, we contributed $6 to our 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. We anticipate making contributions to our pension plans in the range of $50 to $60 during 2011.
 
The funded status at the end of 2011 and future required contributions will depend primarily on the actual return on assets during the year and the discount rate used to measure the benefit obligation at the end of the year. Depending on these factors, and the resulting funded status of our pension plans, the level of future statutory minimum contributions could be material.
 
Contractual Obligations
 
Exelis’s commitment to make future payments under long-term contractual obligations was as follows, as of December 31, 2010:
 
                                         
    Payments Due by Period  
          Less than
                More than
 
Contractual Obligations
  Total     1 Year     1-3 Years     3-5 Years     5 Years  
 
Operating leases(1)
  $ 346     $ 81     $ 116     $ 77     $ 72  
Purchase obligations(2)
    470       272       187       11        
Other long-term obligations reflected on balance sheet(3)
    28       2       6       1       19  
                                         
Total
  $ 844     $ 355     $ 309     $ 89     $ 91  
                                         
 
In addition to the amounts presented in the table above, we have recorded liabilities for uncertain tax positions of $38 as of December 31, 2010. These amounts have been excluded from the contractual obligations table due to an inability to reasonably estimate the timing of such payments in individual years.
 
 
(1) Refer to Note 11, “Leases and Rentals,” in the Notes to the Combined Financial Statements, for further discussion of lease and rental agreements.
 
(2) Represents unconditional purchase agreements that are enforceable and legally binding and that specify all significant terms to purchase goods or services, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase agreements that are cancellable without penalty have been excluded.
 
(3) Other long-term obligations include estimated environmental payments. We estimate, based on historical experience that we will spend between $1 and $3 per year on environmental investigation and remediation. We are contractually required to spend a portion of these monies based on existing agreements with


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various governmental agencies and other entities. At December 31, 2010, our best estimate for environmental liabilities is $22. In addition, other long-term obligations include letters of credit, and payments in connection with our settlement of compliance issues.
 
Contractual obligations as of December 31, 2010 exclude indebtedness of $890. In connection with the spin-off, on September 20, 2011 the Company issued $250 principal amount of 4.250% senior notes that will mature on October 1, 2016 and $400 principal amount of 5.550% senior notes that will mature on October 1, 2021. The net proceeds of the notes offerings have funded, and the proceeds from our commercial paper and/or our credit facility are expected to fund, a net cash transfer of approximately $701 to ITT, with the balance used for general corporate purposes. See “Description of Material Indebtedness.”
 
Indemnities
 
Since our predecessor’s incorporation in 1920, we have acquired and disposed of numerous entities. The related acquisition and disposition agreements contain various representation and warranty clauses and may provide indemnities for a misrepresentation or breach of the representations and warranties by either party. The indemnities address a variety of subjects; the term and monetary amounts of each such indemnity are defined in the specific agreements and may be affected by various conditions and external factors. Many of the indemnities have expired either by operation of law or as a result of the terms of the agreement. We do not have a liability recorded for the historic indemnifications and are not aware of any claims or other information that would give rise to material payments under such indemnities.
 
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, liabilities, revenues and expenses, and the disclosure of contingent liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
 
Significant accounting policies used in the preparation of the Combined Financial Statements are discussed in Note 1, “Description of Business and Summary of Significant Accounting Policies,” in the Notes to the Combined Financial Statements. Accounting estimates and assumptions discussed in this section are those that we consider most critical to an understanding of our financial statements because they are inherently uncertain, involve significant judgments, include areas where different estimates reasonably could have been used, and changes in the estimate that are reasonably possible could materially impact the financial statements. Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results in these areas could differ from management’s estimates under different assumptions or conditions.
 
Revenue Recognition
 
Revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable, collectability is reasonably assured and delivery has occurred or services have been rendered. As a defense contractor engaging in long-term contracts, the majority of our revenue is derived from long-term construction-type and production-type sales contracts for which revenue is recognized under the percentage-of-completion method based on units of delivery, percentage of costs incurred to total costs, or the completion of scheduled performance milestones. For units of delivery, revenues and profits are recognized based upon the ratio of actual units delivered to estimated total units to be delivered under the contract. Under the cost-to-total cost method, revenue is recognized based upon the ratio of costs incurred to estimated total costs at completion. Revenue is recognized under the milestone method, based upon accomplishing a clear deliverable output of contract performance with value to the customer. Revenue under cost-reimbursement contracts is recorded as costs are incurred and includes estimated earned fees or profits calculated on the basis of the relationship between costs incurred and total estimated costs. Revenue and profits on time-and-material type contracts are recognized based on billable rates times direct labor hours incurred plus material and other reimbursable costs incurred. The completed contract method is utilized when reasonable and reliable cost estimates for a project cannot be made. Amounts invoiced to customers in excess of revenue recognized are recorded as deferred revenue, until the revenue recognition criteria are satisfied, and are recorded as advance


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payments and billings in excess of cost in the accompanying balance sheet. Revenue that is earned and recognized in excess of amounts invoiced is recorded as a component of accounts receivables, net.
 
During the performance of long-term sale contracts, estimated final contract prices and costs are periodically reviewed and revisions are made as required and recorded in earnings in the period in which they are determined. Additionally, the fees under certain contracts may be increased or decreased in accordance with cost or performance incentive provisions which measure actual performance against established targets or other criteria. Such incentive fee awards or penalties are included in revenue when there is sufficient information to reasonably assess anticipated contract performance. Amounts representing contract change orders, claim, requests for equitable adjustment, or limitations in funding on contracts are recorded only if it is probable the claim will result in additional contract revenue and the amounts can be reliably estimated. Provisions for estimated losses, if any, on uncompleted long-term contracts, are made in the period in which such losses are determined and are recorded as a component of costs of revenue.
 
To a much lesser extent, we enter into contracts that are not associated with the design, development, manufacture, or modification of complex aerospace or electronic equipment and related services. For such contracts, we recognize revenue at the time title and risks and rewards of ownership pass, which is generally when products are shipped. Certain contracts with customers require delivery, installation, testing, certification or other acceptance provisions to be satisfied before revenue is recognized. Service revenue is recognized as services are performed. For agreements that contain multiple deliverables, we recognize revenue for a delivered element when it has stand-alone value to the customer, there is objective and reliable evidence of fair value of the undelivered elements, and, in arrangements that include a general right of return relative to the delivered element, performance of the undelivered element is considered probable and substantially in the Company’s control.
 
Postretirement Plans
 
Company employees participate in numerous defined benefit pension plans in the United States, which are direct to or sponsored by the Company. The determination of projected benefit obligations and the recognition of expenses related to pension plans are dependent on various assumptions. These major assumptions primarily relate to discount rates, long-term expected rates of return on plan assets, rate of future compensation increases, mortality and termination (some of which are disclosed in Note 12, “Postretirement Benefit Plans,” in the Notes to the Combined Financial Statements) and other factors. Actual results that differ from our assumptions are accumulated and are amortized generally over the estimated future working life of the plan participants.
 
Significant Assumptions
 
Management develops each assumption using relevant Company experience, in conjunction with market-related data for each individual country in which such plans exist. All assumptions are reviewed annually with third party consultants and adjusted as necessary. The table included below provides the weighted average assumptions used to estimate projected benefit obligations and net periodic benefit costs as they pertain to our defined benefit pension plans, as of and for the years ended 2010 and 2009.
 
                 
    2010   2009
 
Discount rate
    5.62 %     6.00 %
Rate of future compensation increase
    4.00 %     4.00 %
Cost Assumptions:
               
Discount rate
    6.00 %     6.25 %
Expected return on plan assets
    9.00 %     9.00 %
Rate of future compensation increase
    4.00 %     4.00 %
 
All of our plan assets are managed by ITT on a commingled basis in a master investment trust. ITT determines our expected return on plan assets by evaluating both historical returns and estimates of future returns. Specifically, ITT analyzes the plan’s actual historical annual return on assets over the past 15, 20 and 25 years; estimates future returns based on independent estimates of asset class returns; and evaluates historical


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broad market returns over long-term timeframes based on our strategic asset allocation, which is detailed in Note 12, “Postretirement Benefit Plans,” in the Notes to the Combined Financial Statements.
 
Based on the approach described above, the long-term annual rate of return on assets is estimated at 9.0%. For reference, our actual geometric average annual return on plan assets was 8.8%, 10.1% and 10.3%, for the past 15, 20, and 25 year periods, respectively.
 
The chart below shows actual returns versus the expected long-term returns for our pension plans that were utilized in the calculation of the net periodic pension cost for each respective year.
 
                         
    2010   2009   2008
 
Expected long-term rate of return on plan assets
    9.0 %     9.0 %     9.0 %
Actual rate of return
    14.1 %     24.1 %     (31.2 )%
 
For the recognition of net periodic pension cost, the calculation of the expected return on plan assets is generally derived using a market-related value of plan assets based on average asset values at the measurement date over the last five years. The use of fair value, rather than a calculated value, could materially affect net periodic pension cost.
 
The discount rate reflects our expectation of the present value of expected future cash payments for benefits at the measurement date. A decrease in the discount rate increases the present value of benefit obligations and increases pension expense. We base the discount rate assumption on current investment yields of high-quality fixed income investments during the retirement benefits maturity period. The pension discount rate was determined by considering an interest rate yield curve comprising AAA/AA bonds, with maturities between zero and thirty years, developed by the plan’s actuaries. Annual benefit payments are then discounted to present value using this yield curve to develop a single-point discount rate matching the plan’s characteristics.
 
The rate of future compensation increase assumption reflects our long-term actual experience and future and near-term outlook. At December 31, 2010, our expected rate of future compensation of 4.0% for U.S. plan participants was unchanged from the prior year.
 
Sensitivity Analysis
 
Funded Status
 
Funded status is derived by subtracting the respective year-end values of the projected benefit obligations from the fair value of plan assets. We estimate that every 25 basis point change in the discount rate impacts the funded status by approximately $10.
 
Fair Value of Plan Assets
 
The plan assets of our postretirement plans comprise a broad range of investments, including domestic and foreign equity securities, interests in private equity and hedge funds, fixed income investments, commodities, real estate and cash and cash equivalents.
 
A substantial portion of our postretirement benefit plan assets portfolio comprises investments in private equity and hedge funds. The private equity and hedge fund investments are generally measured at net asset value. However, in certain instances, the values reported by the asset managers were not current at the measurement date. Accordingly, ITT has estimated adjustments to the last reported value where necessary to measure the assets at fair value at the measurement date.
 
These adjustments consider information received from the asset managers, as well as general market information. The adjustment recorded for these assets represented approximately one percent of total plan assets. Asset values for other positions were generally measured using market observable prices.


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Income Taxes
 
Our income taxes as presented are calculated on a separate tax return basis, and may not be reflective of the results that would have occurred on a stand alone basis. Our operations have historically been included in ITT’s U.S. federal and state tax returns or non-U.S. jurisdictions tax returns.
 
With the exception of certain dedicated foreign entities, we do not maintain taxes payable to/from our parent and we are deemed to settle the annual current tax balances immediately with the legal tax paying entities in the respective jurisdictions. These settlements are reflected as changes in parent company investment.
 
We determine the provision for income taxes using the asset and liability approach. Under this approach, deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates in effect for the year in which we expect the differences will reverse. Based on the evaluation of available evidence, we recognize future tax benefits, such as net operating loss carryfowards, to the extent that we believe it is more likely than not we will realize these benefits. We periodically assess the likelihood that we will be able to recover our deferred tax assets and reflect any changes to our estimate of the amount we are more likely than not to realize in the valuation allowance, with a corresponding adjustment to earnings or other comprehensive income (loss), as appropriate.
 
In assessing the need for a valuation allowance, we look to the future reversal of existing taxable temporary differences, taxable income in carryback years, the feasibility of tax planning strategies and estimated future taxable income. The valuation allowance can be affected by changes to tax laws, changes to statutory tax rates and changes to future taxable income estimates.
 
We have not provided U.S. taxes on the excess of financial reporting over the tax basis of investments in foreign subsidiaries because we plan to reinvest such earnings indefinitely outside the United States. We plan foreign earnings remittance amounts based on projected cash flow needs, as well as the working capital and long-term investment requirements of our foreign subsidiaries and our domestic operations. Based on these assumptions, we estimate the amount we will distribute to the United States and provide the U.S. federal and foreign withholding taxes due on these amounts. Material changes in our estimates of cash, working capital and long-term investment requirements in the various jurisdictions in which we do business could impact our effective tax rate.
 
The calculation of our tax provision involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and to the extent to which, additional taxes will be due. Furthermore, we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
 
We adjust our liability for unrecognized tax benefits in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate. If our estimate proves to be less than the ultimate assessment, an additional tax expense would result. If these amounts ultimately prove to be less than the recorded amounts, the reversal of the liabilities may result in a tax benefit in the period when the liabilities are no longer necessary.
 
Goodwill and Other Intangible Assets
 
We review goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We also review the carrying value of our finite-lived intangible assets for potential impairment when impairment indicators arise. We conduct our annual impairment test as of the first day of the fourth fiscal quarter. We perform a two-step impairment test for


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goodwill. In the first step, we compare the estimated fair value of each reporting unit to its carrying value. If the estimated fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds its fair value, then we must perform the second step of the impairment test in order to measure the impairment loss to be recorded. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference. We estimate the fair value of our reporting units using an income approach. Under the income approach, we calculate fair value based on the present value of estimated future cash flows.
 
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions, particularly related to future operating results and cash flows. These estimates and assumptions include, but are not limited to, revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and identification of appropriate market comparable data. In addition, the identification of reporting units and the allocation of assets and liabilities to the reporting units when determining the carrying value of each reporting unit also requires judgment. Goodwill is tested for impairment at the reporting unit level, which is either the segment (e.g., for the I&TS segment) identified in Note 17, “Segment Information,” in the Notes to the Combined Financial Statements, or one level below (e.g., the divisions of our C4ISR segment). The fair value of our reporting units are based on estimates and assumptions that are believed to be reasonable. Significant changes to these estimates and assumptions could adversely impact our conclusions. Actual future results may differ from those estimates.
 
Our 2010 annual goodwill impairment analysis indicated the estimated fair value of our reporting units significantly exceeded their carrying value. Accordingly, no reporting unit with significant goodwill was at risk of failing step one of the goodwill impairment test at December 31, 2010. In order to evaluate the sensitivity of the fair value estimates on the goodwill impairment test, we applied a hypothetical 100 basis point increase to the discount rates utilized, a ten percent reduction in expected future cash flows, and reduced the assumed future growth rates of each reporting unit to zero. These hypothetical changes did not result in any reporting unit failing step one of the impairment test.
 
New Accounting Pronouncements
 
See Note 2, “Recent Accounting Pronouncements,” in the Notes to the Combined Financial Statements for a complete discussion of recent accounting pronouncements. There were no new pronouncements which we expect to have a material impact on our financial condition and results of operations in future periods.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Exelis has limited exposure to foreign currency exchange risk as the substantial majority of the business is done in U.S. dollars. As an operating segment within ITT, Exelis has not directly experienced exposure to the impacts of certain market risks, including those related to equity price risk and interest rate risk. In the future, expect impacts from any changes in market conditions to be minimized through our normal operating and financing activities. We estimate that a hypothetical 10% adverse movement in the underlying market risks would not be material to Exelis’s financial position, results of operations or cash flows.


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BUSINESS
 
We are a leader in Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) related products and systems and information and technical services, which we supply to military, government and commercial customers in the United States and globally. We provide mission-critical systems in the areas of integrated electronic warfare, sensing and surveillance, air traffic management, information and cyber-security, and networked communications. We also have growing positions in composite aerostructures, logistics and technical services. Our customers include the U.S. Army, Navy, Marines and Air Force, various U.S. civil, intelligence and security agencies, the Federal Aviation Administration, allied militaries and governments, and various commercial customers. For the year ended December 31, 2010 and the six months ended June 30, 2011, our revenue was $5.89 billion and $2.83 billion, respectively, our income from continuing operations was $448 million and $161 million, respectively and 73% of our 2010 sales were derived from the U.S. Department of Defense (DoD) and the U.S. Intelligence Community.
 
We operate in two segments: C4ISR Electronics and Systems, and Information and Technical Services. Our C4ISR Electronics and Systems segment provides communications, electronic warfare, imaging and image-processing, radar and sonar systems, space systems, and aerostructures for government and commercial customers around the world. Our Information and Technical Services segment provides a broad range of systems integration, network design and development, cyber, intelligence, operations, sustainment, advanced engineering, logistics, space launch and range-support solutions for a wide variety of U.S. military and government agency customers. We have successfully completed and integrated several acquisitions over the last five years, which have broadened our product and technology portfolio, expanded our customer base, and contributed to our growth.
 
We employ approximately 20,400 people on four continents. This includes an experienced management team with a proven ability to win new contracts, drive premier operating efficiency, and lead development of game-changing technologies and solutions.
 
Our Business Strategy and Core Strengths
 
We intend to create value by being an agile, efficient and reliable supplier of critical systems, components and services for our core U.S. Government customers as well as our growing allied international government and commercial customer base, particularly in the areas of C4ISR-related electronics, aerostructures, air traffic management, and secure, integrated data and voice networks. We view the following strategies as our fundamental means for value-creation:
 
Proactive portfolio management:  We take a proactive and disciplined approach to continuously shape our portfolio by aligning our businesses with enduring and growing customer needs. Our multifaceted defense portfolio has been well-positioned to support the critical needs of the DoD through a decade of heavy troop deployments and conflict. Hedging against the expectation of tighter defense budgets to come, we have steadily broadened our customer base over the last several years to include other U.S. Government agencies, allied international governments and commercial customers, with product and service offerings in areas of enduring and growing demand such as air traffic management, advanced imaging and global positioning systems, weather, composite structures, communications and electronics, and information technology. As set forth in the chart below, our end-user customers were approximately 27% non-DoD for the year ended December 31, 2010.


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2010 Sales by End User
 
(PIE CHART)
 
While we intend to protect and expand our core positions as a leading prime system and service contractor and first-tier defense electronics supplier, we recognize that defense spending trends and priorities are subject to change and are likely to be different over the coming decade than they were in the last. To this end, we will undertake select divestitures and acquisitions that enhance our ability to deliver ever greater value to our shareholders.
 
Innovative solutions:  We focus on investing in next generation technologies and solutions that address vital customer priorities. We intend to sustain and cultivate our strong culture of innovation which embraces:
 
  •  World-leading technologies in integrated electronic warfare, night vision, networked information and communications, sensors and surveillance, image processing, air traffic management, and aerostructures.
 
  •  Creative approaches to rapidly fielding affordable solutions for critical customer needs, such as our “Global Network On the Move Active Distribution” (GNOMAD) solution for affordable vehicle-mounted tactical satellite communications, and our handheld Netted Iridium radios for secure, 24/7 beyond-line-of-sight voice and data communications, both provided to support urgent need requests from units deployed to Afghanistan; and our compact imaging systems mounted on Unmanned Aerial Vehicles (UAVs) in support of the U.S. Air Force’s “Gorgon Stare” program, to perform persistent surveillance missions over wide geographical areas.
 
  •  Collaboration internally, across our diverse businesses, and teaming with expert partners to deliver “best-in-class” offerings on new business opportunities, such as our winning solution as the prime contractor for the Federal Aviation Administration’s (FAA) Automated Dependent Surveillance-Broadcast (ADS-B) system, currently being deployed to provide GPS-based positioning data for aircraft throughout the United States, and our role as a major subcontractor on the Global Positioning System — Advance Control Segment (GPS-OCX) project for the U.S. Air Force, where we are providing key components for navigation and system security.
 
Organic and geographic growth, while broadening our customer base:  We intend to grow market share, expand into adjacencies and continue to penetrate non-DoD customers where we can build on our domain expertise and extend our leadership positions. Our strong incumbent positions and large fielded base of night vision devices, radios, jammers, radars and other electronic equipment (much of it expected to remain in operation for decades) provide opportunities for future upgrades, modernization and sustainment contracts as the military services seek affordable alternatives to costly and unproven replacement programs in an effort to stretch procurement dollars in a


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tighter fiscal environment. We also intend to build on the growth we have achieved in international sales over the last two years. For the year ended December 31, 2010, international sales were $627 million and comprised approximately 11% of our total revenue. Our focus is on allied countries with enduring or growing defense needs or that seek modernization of their air traffic management infrastructures, particularly in the Middle East, the United Kingdom, India, Taiwan, Korea, Australia and Brazil. We will also focus on natural extensions of existing technologies into commercial markets, such as air traffic management data for commercial air carriers and composite structures for commercial fixed- and rotary-wing aircraft.
 
Disciplined Financial Management:  We intend to continue to combine disciplined goal-setting, accountability for results, and our rigorous Integrated Management System, reinforced by our performance assessment and incentive programs, to align our organization around achieving our business objectives. Our strategies include a combination of organic growth, disciplined capital allocation, portfolio management, and premier operational excellence.
 
Leveraging our Core Strengths:  We have created a culture of “adaptive ingenuity” — combining premier operating efficiency, intimate knowledge of our customers’ needs, technical expertise and innovation. We believe that we are quicker and more nimble than our larger competitors, and better able to provide rapid and affordable solutions to our customers’ most pressing needs. We are also “platform-agnostic,” in that we provide essential systems and components on a wide variety of aircraft, ships, ground vehicles, unmanned systems, and satellites, so that our business prospects are not tied to the future of any single program. We see our diverse portfolio as an advantage in the current defense budget environment, as we have strong incumbent positions on many key programs, a robust pipeline of competitive opportunities, and, for the year ended December 31, 2010 and the six months ended June 30, 2011, no single program accounted for more than 7% of our revenue. Our core strengths are further explained below:
 
  •  Premier operating efficiency:  Our world-class Lean and Six Sigma programs are embedded in our culture and operating ethic. In addition, in 2010 we launched and completed a structural transformation that reduced the number of business units, layers of management, and facility footprint, while right-sizing our workforce to prepare for the reductions we expected in 2010 and 2011 in the volumes of some of our products, including Single Channel Ground and Airborne Radio System (SINCGARS) radios, Counter Radio-Controlled Improvised Explosive Device Electronic Warfare (CREW) jammers, and night vision goggle purchases from peak war-surge levels to normal volumes. We intend to continue to aggressively reduce costs, minimize overhead, increase productivity, and streamline our footprint where necessary to ensure optimum utilization of our production facilities.
 
  •  Customer relationships:  Understanding our customers’ needs is essential to winning and sustaining their trust and earning repeat business and, as such, we will continue our intense focus on the “Voice of the Customer.” We believe that an innovative culture, domain expertise and an understanding of customer needs are essential to developing and delivering tailored customer solutions.
 
  •  Experienced team:  Our senior corporate team, value-center presidents, and business unit general managers have an average of 20 years experience in the aerospace and defense industry. Approximately 25% of our employees have engineering degrees and approximately 200 of our employees hold PhDs.
 
  •  Diverse portfolio and breadth of programs:  Our systems and components provide a wide array of mission-enabling technologies on defense and commercial platforms in the air, at sea, on the ground, and in space. For example, our systems (spanning electronics, antennas, and structural systems) are on the F-35 Joint Strike Fighter (JSF), F/A-18C/D/E/F, F-22, F-16, F-15E, F-14, EA-18, EA-6B, E-2C, B-1B, B-2, B-52, C-130, CH53K, C17, AV-8B, A-6F, P-8, AH-64, MQ-9 Reaper (UAV), and a variety of NATO aircraft including Tornado, Eurofighter and Gripen. Our composite aerostructures and antennas are widely used on commercial jets made by Boeing and Airbus, and Sikorsky commercial helicopters. At sea, our systems and technologies are essential to the Navy’s aircraft carriers, submarines and Littoral Combat Ships, as well as the Coast Guard’s Deepwater platforms. On the ground, we provide communications and electronic force protection systems for over 120 ground vehicle and weapon system types, including HMMWVs, MRAPs, M-ATVs, and various armored combat vehicles. Also, as the leading supplier of night vision goggles, we help pilots, ground troops and surface ship combatants to “own the night,” whether operating aboard the


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  many platforms noted above or dismounted. In space, our positioning, navigation and meteorological systems are on board every GPS satellite and numerous weather satellites, and we are a leader in advanced optical systems for aerospace applications. In commercial aviation, we are the prime contractor for the FAA’s ADS-B contract, which will improve the safety, capacity and efficiency of aviation while accommodating future air traffic growth. We are also extending our reach within the commercial aviation market by leveraging the aviation data we collect through ADS-B into our next-generation airport operations management system called Symphony. We believe our diversified platform and program exposure, extending from deep space to undersea, is a core strength that mitigates risk to specific defense program cuts and creates multiple opportunities for growth.
 
Our Business Segments
 
We operate in two segments: C4ISR Electronics and Systems, and Information and Technical Services.
 
C4ISR Electronics and Systems
 
Our C4ISR Electronics and Systems segment had revenues of $3.6 billion, $3.8 billion and $3.9 billion for the years ended December 31, 2010, 2009 and 2008, respectively, and accounted for 61%, 62%, and 64%, respectively, of our combined revenues. This segment consists of the following major product lines:
 
Integrated Electronic Warfare Systems (IEWS)
 
Integrated Electronic Warfare Systems (IEWS) is a leader in Electronic Warfare Countermeasures (ECM) and an emerging leader in space microelectronics, mine-defense solutions and antennas. With a history spanning more than 50 years, IEWS is the world’s largest producer of ECM solutions for tactical and strategic aircraft. IEWS develops, produces and sells electronic warfare solutions to all major DoD services, classified customers and to allied nations. IEWS is a key player on platforms such as the premier frontline strike fighter, the F-18, and Special Operations Forces (SOF) MH-60s and MH-47, and also holds prominent electronic warfare positions on the B-1B, B-52, CV-22, C-130 and F-16 (International) platforms. We are a key provider of mechanical and combined influence mine sweeping devices to the U.S. Navy. IEWS is also a leader in Airborne Electronic Attack (AEA), fielding systems on the B-1, B-52, F-16, F-18 SOF C-130s and the EA-6B. We have pursued cutting-edge technology with all of the U.S. services and agencies including DARPA. We currently have over 25 development contracts underway that we believe will revolutionize electronic warfare, including a family of very light electronic warfare payloads for the ever growing array of unmanned vehicles.
 
Communications Systems and Force Protection Systems (CFPS)
 
Communication Systems and Force Protection Systems (CFPS) is a leader in the design and manufacture of radio frequency (RF)-based systems. The business has fielded more than 20,000 state-of-the-art CREW Vehicle Receiver/Jammer (CVRJ) systems, currently in use by the U.S. Army, Marine Corps, Navy and Air Force, which is the front line vehicle-mounted Improvised Explosive Device (IED) countermeasure device deployed today. Sales of our CREW products accounted for 5%, 11% and 12% of combined net sales in 2010, 2009 and 2008, respectively. CFPS was selected for the Joint Counter Radio — Controlled Improvised Explosive Device Electronic Warfare (JCREW) 3.3 contract for the development of the next generation counter-IED system. We also specialize in tactical communications systems, satellite communications systems, wireless communications systems, special mission communications systems, information assurance and cryptographic systems, Global Positioning Systems (GPS), mobile ad hoc networking (MANET) solutions, and integrated C3 solutions for U.S. and allied forces, as well as many government agencies and for commercial air traffic control. Products include the SINCGARS, the most widely deployed military tactical radio program in the world with more than 650,000 units in use in more than 35 countries. CFPS is also the developer of the Soldier Radio Waveform (SRW), one of the key networking enablers for the next-generation Joint Tactical Radio System (JTRS) program. We have developed advanced technology to implement the SRW waveform at lower size, weight, power and cost (SWAP-C), and will be a strong competitor for future production of JTRS systems.


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Radar, Reconnaissance and Acoustic Systems (R2A)
 
Radar, Reconnaissance and Acoustic Systems (R2A) provides high-performance, high-quality RF and acoustic surveillance sensors, integrated radar and Precision Air Traffic Control surveillance systems for both domestic and international customers, with a broad portfolio of related technology-based products in the commercial and medical areas. R2A’s core capabilities include defense surveillance radars, air traffic control and management radars, command and control, acoustic sensors, sonar systems, tactical data links and synthetic aperture radars. The R2A business also provides electronic warfare and signal intelligence systems for reconnaissance and surveillance, with monitoring and signal processing systems and equipment for Electronic Intelligence (ELINT), Electronic Support Measures (ESM), Electronic Counter Measures (ECM) and Signals Intelligence (SIGINT) applications. We have provided more than 1,500 ESM /ELINT systems to customers in more than 30 countries during the past 20 years. Capitalizing on its capability to produce highly engineered piezo electric devices, R2A has developed innovative applications of this technology to address the energy harvesting and healthcare markets. In addition, we partnered with the oncology company Novocure to adapt our defense-focused piezoelectric ceramic technology into disks that radiate a low-intensity, alternating electric field to slow and reverse tumor growth in adult patients with glioblastoma multiforme (GBM), the most aggressive and common form of recurrent brain cancer.
 
Integrated Structures (IS)
 
Integrated Structures (IS) is a leading designer and producer of aircraft-armament suspension and release equipment, weapons interface systems, and advanced composite structures and subsystems for military and commercial customers. IS has built a strong leadership position and worldwide recognition in the weapons carriage and release area, having produced well over 22,000 systems during the past 45 years. This strength and our strong forecasted growth comes from our sole source position on many of the major airframes utilized by DoD and international forces, including the F-15, F-22, F-35, F-16, F/A-18, P-8, AV-8B and MQ-9. IS is among the most technically advanced designers and manufacturers of lightweight advanced fiber-reinforced composite structures. We provide solutions where reduced weight, strength and durability are critical to mission success, aircraft performance and efficiency. We have supplied composites to most major aerospace prime contractors, including Boeing, Airbus, Lockheed Martin, Sikorsky and BAE Systems.
 
Night Vision and Imaging
 
Our Night Vision and Imaging business is a leader in image intensification, sensor fusion and digital night vision technology, integrated power and sensing devices, and decision support software and services solutions that manage, exploit, analyze, visualize, interpret, and disseminate image related data. We are the world’s leading developer, producer, and supplier of Generation 3 image intensification technology for U.S. and allied military forces, as well as the federal homeland security market, and we are the single largest producer of high performance night vision products in the world. We provide AN/PVS-14 and AN/PVS-7 ground night vision goggles and spare image intensifier tubes to the U.S. military and allies via foreign military sales and we are the sole supplier to the U.S. military for the AN/AVS-6 and -9 aviation night vision goggle, which provides rotary- and fixed-wing pilots the ability to operate in extreme low-light situations. We also developed (and are the sole provider of) the Enhanced Night Vision Goggle Optical (ENVG(O)) system, which is the first production goggle to optically overlay traditional night vision imagery with long wave thermal infrared imagery. This allows the U.S. military to effectively operate in extreme low light conditions and obscured battlefield conditions. We are also a leader and a recognized innovator of night vision power supply technology and custom power supplies for commercial and military applications worldwide, including military ground vehicles, munitions, advanced countermeasures, radar systems and avionics. Additionally, we offer integrated software solutions that scientists, defense and intelligence professionals, Geographic Information System (GIS) users, researchers, and medical research professionals use to turn complex data into useful information. From remote sensors on UAVs, we deliver streaming imagery and video data in an environment challenged by information overload, constrained bandwidths and multiple end-users. Our capabilities span the geospatial intelligence chain for capturing, processing and analyzing, managing, and disseminating imagery and video.


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Intelligence, Surveillance and Reconnaissance Systems (ISR)
 
Our Intelligence, Surveillance and Reconnaissance (ISR) Systems business serves a broad array of government, civil and commercial customers with intelligence, surveillance and reconnaissance systems that enhance information superiority, contribute to our national security, provide actionable data, and protect property and human life. Our specialized capabilities include, high reliability remote sensing payloads for ground, air and space, offering active and motion imaging, anti-jam signal generation data encryption, information processing and system performance modeling and simulation. We also provide solutions that map and monitor the earth for a variety of commercial and governmental users. Our imaging payloads or sensor systems have been at the heart of nearly every U.S. commercial remote sensing satellite system. Our sensors currently provide all of the commercial high resolution space-based imagery in the United States, and we now are expanding this expertise to pursue several new opportunities in Asia and the Middle East. Our environmental systems monitor and evaluate our global environment with space and airborne remote sensing and ground data processing.
 
Positioning, Navigation and Timing (PNT)
 
Our Positioning, Navigation and Timing (PNT) business is a total GPS navigation systems supplier providing high-performance, reliable, cost-effective GPS payload, receiver and control solutions. We have developed more than 50 GPS satellite payloads that have been on every GPS satellite ever launched and accumulated over 500 years of on-orbit life without a single mission-related failure due to our equipment. Today, new GPS technologies are being developed that will dramatically improve the accuracy and reliability of this global utility under the GPS III program. The next-generation GPS Operational Control Segment (OCX) will provide command, control and mission support for all current and future GPS satellites. We are providing the key navigation processing elements and precision monitor station receivers during the current phase of the GPS Operational Control Segment (OCX) program that includes advanced anti-jam capabilities, improved system security, accuracy and reliability. GPS OCX will be based on a modern, service-oriented architecture that will integrate a government and industry open system standard that provides command, control and mission support for all current and future GPS satellites.
 
Information and Technical Services
 
Our Information and Technical Services segment had revenues of $2.3 billion, $2.3 billion and $2.2 billion for the years ended December 31, 2010, 2009 and 2008, respectively, and accounted for 39%, 38% and 36%, respectively, of our combined revenue. The segment consists of the following major program areas:
 
Air Traffic Management
 
Our Air Traffic Management business has a 30-year history as a trusted provider of air traffic control navigation, communication and surveillance solutions. We provide the FAA with engineering expertise and full system solutions in the development and implementation of a modernized air traffic system. Our core program is the ADS-B system: the cornerstone program of the FAA’s Next Generation Air Transportation System (NextGen) initiative to modernize from a ground-based system of air traffic control to a satellite-based system of air traffic management. As the prime contractor on ADS-B, we are designing, building and operating a nationwide system of radio communications, telecommunications networks, information technology and software to deliver highly accurate, networked, real-time surveillance data to the automated systems of the FAA. In another major NextGen program, we are leading a world-class team of aviation industry companies to assist the FAA in the full realization of the vision associated with the modernization initiative. We are developing leading-edge concepts under the Systems Engineering 2020 (SE2020) contract. The work spans all dimensions of air traffic control including ground systems, avionics, aircraft, air traffic control rules and procedures, human factors, safety and security, environmental processes and standards. We are extending our integrated network systems capabilities to the commercial aviation market by introducing a comprehensive, web-based application suite called airscene.com, which enables key business functions for airports and airlines to improve efficiencies in their operations. This real-time, comprehensive flight tracking data is essential to


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improving airport stakeholders’ operations, including flight information display systems, billing, auditing, resource allocation and situational awareness.
 
Network Systems
 
Our Network Systems business provides NASA and the DoD with engineering, operations and modernization services in support of a broad range of communication systems and technologies that are the strategic and operational heart of critical national systems. We design, develop and support large-scale ground communications networks by providing mission network planning and integration services, systems and network engineering, operations, maintenance, and development and sustainment engineering work across the United States and around the world. We have supported NASA for more than 25 years as a leading provider of advanced engineering services for its space and ground communications networks. We are the prime contractor on NASA’s Space Communications Network Services (SCNS) contract for the Goddard Space Flight Center, which provides most of the communications and tracking services for a wide range of Earth-orbiting spacecraft, such as the International Space Stations and the space shuttle. We are also the prime contractor for the Joint Spectrum Center’s (JSC) Electromagnetic Spectrum Engineering Services contract, where we provide engineering systems support, technical analysis, test support, and long-term strategic planning as JSC meets national security and military objectives related to the use of electromagnetic spectrum.
 
Advanced Information Systems
 
Our Advanced Information Systems business serves a broad range of federal customers in defense, intelligence and homeland security. We serve critical missions in military and national intelligence, deterrence and defense against chemical, biological, radiological nuclear and explosive (CBRNE) threats, strategic programs and other core defense programs. Our long history translates into a deep understanding of customer missions and challenges, and we apply that expertise to provide our customers with innovative solutions for ever-changing needs.
 
We develop information-enabled solutions for U.S. Government customers that rely on our expertise to securely access, integrate and share sensitive data. By delivering a global network that connects DoD and national agencies together into a collaborative, secure, services-oriented architecture, we are able to help our customers connect to and discover information in real time to support tactical exploitation of intelligence on the network. These solutions integrate key capabilities in cyber defense, cross-domain information sharing, broad enterprise applications of information technology, and the implementation of leading edge network and systems architectures.
 
Communications and Information Systems (CIS)
 
The Communications and Information Systems (CIS) business supports a variety of U.S. and Joint Forces military activities, as well as Federal civilian communications infrastructures worldwide, ranging from wideband satellite communications systems to diverse network operations and management services. CIS’s core capabilities include network management; mobile and fixed satellite communications operations and maintenance (SATCOM O&M); help desk support; switch, node and router support; database development; engineering; furnishing and installation of communications systems; information assurance of protected military networks; and field and depot level maintenance of communications equipment. As the prime contractor for the U.S. Army Network Command’s Total Army Communications for Southwest Asia, central Asia and Africa program (TACSWACAA), CIS maintains world-class operational availability and information security for network resources in the largest battlefield network ever deployed. For the U.S. Southern Command, it operates and maintains tethered aerostats that perform core drug interdiction and air sovereignty missions along the U.S. southern border. High-profile communications support includes operations and maintenance for missions such as the Defense Red Switch Network, which provides the President, Secretary of Defense, Joint Chiefs of Staff, combatant commanders and various agencies with secure communications technology and systems.


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Space Ground and Range Systems (SGRS)
 
Our Space Ground and Range Systems (SGRS) business provides systems engineering, lifecycle sustainment, logistic support, modernization, and operations and maintenance for U.S. military launch, test and training ranges, NASA’s Ground Communications Networks and other high-priority U.S. Government assets throughout the world. SGRS supports complex mission requirements that cover a broad spectrum of support, from facilities maintenance to reverse engineering of legacy systems. Key areas of support include system engineering, sustainment, logistic/supply, depot maintenance, software engineering and configuration management for range instrumentation such as tracking, telemetry, optical, weather, communications and command and control networks/systems. SGRS also provides payload processing and launch services for numerous government agencies. These key systems/assets are critical to the launch range and space communications network infrastructures, including the world’s largest air, land and sea training range for the U.S. Navy, the U.S. Air Force space launch ranges on the U.S. East and West Coasts and NASA’s space ground communications networks.
 
Middle East Programs (MEP)
 
Our recently created Middle East Programs (MEP) provides oversight and management functionality for our teams working in that region. The core capabilities of the Middle East programs (MEP) include logistics, vehicle maintenance and repair, facility and utilities maintenance and repair services, civil engineering, minor construction, transportation services, base operations, unarmed and armed guard services, and emergency fire and life support services. As a leading provider of U.S. Army wheeled and tracked vehicle maintenance, MEP has built a strong track record of innovation and new service development, using Lean Six Sigma capabilities to devise optimum methods to perform maintenance on war-damaged vehicles. MEP also maintains a diverse array of equipment, from small arms to Patriot missiles, performing maintenance tasks both domestically and overseas. Logistics services also include transport of soldiers and equipment for combat operations. The full range of logistics tasks, encompassing supply, mobilization, transportation, equipment maintenance, property accountability and other facility and utilities materiel operations, are typically carried out by MEP employees for the Army Prepositioned Stock programs. The largest contract effort in the MEP program provides infrastructure and logistics support through the Kuwait Base Operating Support, Services and Security (K-BOSSS) contract. The effort supports the U.S. Army with the full spectrum of logistics, security, transportation, life support and facilities services at Camp Arifjan, Camp Buehring, Camp Virginia and a number of other critical military installations in the Kuwait area of responsibility. This contract represented the fourth major facilities operations contract awarded to Mission Systems in 2010 and solidified our role as a premier provider of base operations services in the Middle East.
 
U.S. and Europe Programs
 
The U.S. and Europe Programs effort is primarily centered on logistics, base operations and infrastructure support to multiple military and governmental agencies in the United States and Europe. The business consists of supporting contracts with the U.S. Air Force and U.S. Army including bases in the United States (Fort Bragg, Fort Benning and Maxwell AFB), Germany (Kaiserslautern) and Kosovo. We provide full spectrum base operating support, logistics, supply, maintenance and security to each of these installations. U.S. and Europe programs also focus on the comprehensive nature of surface, rail and air transportation services, all life support services, as well as civil engineering and minor construction services.
 
Afghanistan Programs (AP)
 
Afghanistan Programs (AP) was launched in early 2011 to manage two of the company’s three newest large programs and our other efforts in Afghanistan. Work in Afghanistan consists of two contracts with the U.S. Army Corps of Engineers to provide facilities operations, maintenance and training services for the Afghan National Security Forces (ANSF) and the Combined Security Transition Command in both Northern and Southern Afghanistan. Under these two contracts, AP provides operations and maintenance support for more than 300 ANSF facilities at a variety of sites in Afghanistan, while simultaneously training Afghanis to assume responsibility for the facilities at the completion of the contract. AP also supports the warfighter under


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the Logistics Civilian Augmentation Program (LOGCAP); under the Air Force Civilian Augmentation Program (AFCAP); and under the Department of State (Counter Narco-Terrorism Program — CNTPO). These programs provide logistics and supply operations, airfield operations, air traffic control and transportation support to the U.S. warfighter and to the Afghanistan National Security Forces under CNTPO.
 
Industry Background
 
The federal government remains the largest consumer of services and solutions in the United States, and the DoD is the largest purchaser of services and solutions in the federal government. In addition to the DoD, we do substantial business with the U.S. Intelligence Community, the National Aeronautics and Space Administration, the FAA, the Department of Homeland Security, and allied international customers. We are both a “prime” contractor and a supplier of first-tier systems, subsystems, and components, with approximately half of our revenues coming from contracts where we are the prime.
 
There is considerable debate over the level of U.S. federal spending, and a general consensus that deficit reduction concerns will put pressure on all areas of discretionary spending. In this environment, we believe that cuts in defense spending within the next few years are likely, but that they will be relatively modest in contrast to the substantial spending and force structure reductions that followed the ends of World War II, the Korean War, the Vietnam War and the Cold War. Along with the ongoing threat of terrorism, there are the increasing threat of cyber attacks; cautious concern over the ambitions, capabilities, and intentions of certain regional powers; nuclear proliferation; and pirating. We anticipate that defense spending is likely to follow a slightly downward track for the next three to four years.
 
Within the defense, intelligence community and homeland security budgets, we expect there to be pockets of increased spending, driven by growing needs for sophisticated intelligence gathering, secure information sharing, and affordable versus “exquisite” solutions to modernize aged, outmoded, or war-torn equipment. Thus we expect sustained or increasing levels of federal funding in the areas of C4ISR, information technology, cyber-security and cyber warfare, integrated electronic warfare, networked communications, strike aircraft, UAVs, submarines, logistics, sustainment, and affordable upgrades to fielded equipment.
 
Within the FAA, we expect continued budget priority to be placed on deployment of next generation air traffic management systems, and expect Congress to continue to fund these critically important programs, driven by increased volumes of air traffic; safety, cost and environmental benefits; the need to better manage congestion around major airports; and the urgent need to replace outdated technology and infrastructure.
 
Within the NASA and National Oceanic and Atmospheric Administration budgets, we expect the focus of any cuts in a period of fiscal austerity to be primarily in high-cost and ambitious manned space programs. However, we expect the earth science and space communications network programs in which we participate to hold up well, as reliance on timely and accurate weather data, environmental monitoring and reliable communications will continue to be priorities in an increasingly mobile, connected, and environmentally responsible society.
 
Internationally, austerity measures have affected defense spending among some Western European allies, but we project increased spending in select allied countries facing regional volatility, such as the Middle East. Turmoil in that region could be the cause of increased national security spending by a number of countries. Jane’s Information Group, a leading global defense industry analyst firm, lists the United Kingdom and Saudi Arabia in the top five among defense spenders, and South Korea, Australia, India and Brazil in the top 15. We also see strong interest from India, Australia and Brazil for modernizing their air-traffic management systems.
 
Customers
 
Our primary customers are the DoD and the U.S. intelligence community. We also have established relationships with other U.S. Government customers, including the FAA, Department of Homeland Security,


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National Aeronautics and Space Administration and several first-responder agencies. Our revenues from the U.S. Government were as follows:
 
                 
Year Ended December 31
  2010     2009  
 
Direct
               
Department of Defense (DoD)
  $ 4,311     $ 4,803  
FAA/NASA/Other U.S. Government and U.S. Commercial
    953       690  
International
    627       568  
                 
Total revenue
  $ 5,891     $ 6,061  
                 
 
International Sales
 
Our sales to customers outside the United States were $627 million, or 11% of total revenue, in 2010. Included in sales to customers outside the United States were foreign military sales through the U.S. Government. Sales and income from international operations and investments are subject to U.S. Government laws, regulations and policies, including the International Traffic in Arms Regulations (ITAR) and the Foreign Corrupt Practices Act and the export laws and regulations described below, as well as foreign government laws, regulations and procurement policies and practices, which may differ from U.S. Government regulation, including import-export control, investments, exchange controls, repatriation of earnings and requirements to expend a portion of program funds in-country. For example, EU product content regulations that ban or restrict certain hazardous substances restrict international sales of products sold to commercial customers. In addition, embargoes, international hostilities and changes in currency values can also impact our international sales.
 
The export from the United States of many of our products may require the issuance of a license by either the U.S. Department of State under the Arms Export Control Act of 1976 (formerly the Foreign Military Sales Act) and its implementing regulations under the ITAR, the U.S. Department of Commerce under the Export Administration Act and its implementing regulations as kept in force by the International Emergency Economic Powers Act of 1977 (IEEPA), and/or the U.S. Department of the Treasury under IEEPA or the Trading with the Enemy Act of 1917. Such licenses may be denied for reasons of U.S. national security or foreign policy. In the case of certain exports of defense equipment and services, the Department of State must notify Congress at least 15 to 60 days (depending on the identity of the importing country that will utilize the equipment and services) prior to authorizing such exports. During that time, Congress may take action to block or delay a proposed export by joint resolution which is subject to Presidential veto.
 
U.S. Government Regulatory Matters
 
We act as a prime contractor or major subcontractor for numerous U.S. Government programs. As a result, we are subject to extensive regulations and requirements of the U.S. Government agencies and entities which govern these programs, including with respect to the award, administration and performance of contracts under such programs. We are also subject to certain unique business risks associated with U.S. Government program funding and appropriations and U.S. Government contracts, and with supplying technologically advanced, cutting-edge defense-related products and services to the U.S. Government.
 
U.S. Government contracts generally are subject to the Federal Acquisition Regulation (FAR), which sets forth policies, procedures and requirements for the acquisition of goods and services by the U.S. Government, agency-specific regulations that implement or supplement FAR, such as the DoD’s Defense Federal Acquisition Regulation Supplement (DFARS) and other applicable laws and regulations. These regulations impose a broad range of requirements, many of which are unique to government contracting, including various procurement, import and export, security, contract pricing and cost, contract termination and adjustment, and audit requirements. A contractor’s failure to comply with these regulations and requirements could result in reductions to the value of contracts, contract modifications or termination, and the assessment of penalties and fines and lead to suspension or debarment, for cause, from government contracting or subcontracting for a period of time. In addition, government contractors are also subject to routine audits and investigations by U.S. Government agencies such as the Defense Contract Audit Agency (DCAA). These agencies review a


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contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. The DCAA also reviews the adequacy of and a contractor’s compliance with its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems.
 
U.S. Government programs generally are implemented by the award of individual contracts and subcontracts. Congress generally appropriates funds on a fiscal year basis even though a program may extend across several fiscal years. Consequently, programs are often only partially funded initially and additional funds are committed only as Congress makes further appropriations. The contracts and subcontracts under a program generally are subject to termination for convenience or adjustment if appropriations for such programs are not available or change. The U.S. Government is required to equitably adjust a contract price for additions or reductions in scope or other changes ordered by it.
 
We are also involved in U.S. Government programs which are classified by the U.S. Government and cannot be specifically described in this Information Statement. The operating results of these classified programs are included in our financial statements. The business risks and considerations associated with these classified programs generally do not differ materially from those of our other U.S. Government programs and products, and are subject to the same oversight and internal controls as other U.S. Government programs.
 
We are subject to government regulations and contract requirements which may differ from U.S. Government regulation with respect to our sales to non-U.S. customers. Sales and income from international operations and investments are subject to U.S. Government laws, regulations and policies, including the International Traffic in Arms Regulations (ITAR) and the Foreign Corrupt Practices Act (FCPA) and export laws and regulations, as well as foreign government laws, regulations and procurement policies and practices, which may differ from U.S. Government regulation, including import-export control, investments, exchange controls, repatriation of earnings and requirements to expend a portion of program funds in-country. The export from the U.S. of many of our products may require the issuance of a license by either the U.S. Department of State under the Arms Export Control Act of 1976 (formerly the Foreign Military Sales Act) and its implementing regulations under the ITAR, the U.S. Department of Commerce under the Export Administration Act and its implementing regulations as kept in force by the International Emergency Economic Powers Act of 1977 (IEEPA), and/or the U.S. Department of the Treasury under IEEPA or the Trading with the Enemy Act of 1917. Such licenses may be denied for reasons of U.S. national security or foreign policy. In the case of certain exports of defense equipment and services, the Department of State must notify Congress at least 15-60 days (depending on the identity of the importing country that will utilize the equipment and services) prior to authorizing such exports. During that time, Congress may take action to block or delay a proposed export by joint resolution which is subject to Presidential veto.
 
Competition
 
We compete against many companies in the U.S. defense industry, but primarily against Lockheed Martin Corporation, The Boeing Company, Raytheon Company, General Dynamics Corporation, L-3 Communications Corporation, SAIC Inc., Northrop Grumman Corporation, Harris Corporation and BAE Systems, Inc. Internationally, we also compete against these same companies as well as Thales Group, EADS N.V., Finmeccanica S.p.A., SAAB and many others. Intense competition and long operating cycles are both key characteristics of our business and the defense industry. It is common in this industry for work on major programs to be shared among a number of companies. A company competing as a prime contractor may, upon ultimate award of the contract to another party, serve as a subcontractor for the ultimate prime contracting party. It is not uncommon to compete for a contract award with a peer company and, simultaneously, perform as a supplier to or a customer of such competitor on other contracts. The nature of major defense programs, conducted under binding contracts, allows companies that perform well to benefit from a level of program continuity not common in many industries.
 
Our success in the competitive defense industry depends upon our ability to develop and market our products and services, as well as our ability to provide the people, technologies, facilities, equipment and financial capacity needed to deliver those products and services with maximum efficiency. We must continue


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to maintain sources for raw materials, fabricated parts, electronic components and major subassemblies. In this manufacturing and systems integration environment, effective oversight of subcontractors and suppliers is as vital to success as managing internal operations.
 
Similarly, there is intense competition among many companies in the information and services markets, which are generally more labor intensive with competitive margin rates and contract periods of shorter duration. Competitors include DynCorp, KBR, Fluor and several of the defense industry participants mentioned above, as well as many other large and small entities with expertise in various specialized areas. Our ability to successfully compete in the information and services markets depends on a number of factors; the most important of which is the capability to deploy skilled professionals, many requiring security clearances, at competitive prices across the diverse spectrum of these markets. Accordingly, we have implemented various workforce initiatives to ensure our success in attracting, developing and retaining sufficient resources to maintain or improve our competitive position within these markets.
 
Intellectual Property
 
We own an intellectual property portfolio of U.S. and foreign patents, and unpatented know-how, data, software, trademarks and copyrights, all of which contribute to the preservation of our competitive position in the marketplace. Although our intellectual property rights in the aggregate are important to the operation of our business, we do not believe that any existing patent, license or other intellectual property right is of such importance that its loss or termination would have a material adverse effect on our business, taken as a whole.
 
In addition to our patent portfolio, we are licensed to use certain patents, technology, and other intellectual property rights owned and controlled by others, and, the U.S. Government and/or other entities are licensed to use certain patents, technology, and other intellectual property rights owned and controlled by us, under U.S. Government contracts or otherwise. We believe that our business, taken as a whole, is not materially dependent on any one license agreement or related group of license agreements.
 
Research and Development
 
We conduct research and development activities to continually enhance our existing products and services and develop new products and services to meet our customers’ changing needs and requirements and address new market opportunities. During 2010, we expensed $119 million on research and development efforts compared with $142 million in 2009 and $111 million in 2008. These expenditures principally have been for product development for the U.S. Government. We also conduct funded research and development activities under U.S. Government contracts which are included in total revenue. For additional information related to our research and development activities, see Note 1, “Description of Business and Summary of Significant Accounting Policies,” in the Notes to the Combined Financial Statements.
 
Employees
 
Respect, responsibility and integrity are our core values. We intend to continue our rigorous corporate responsibility programs which ensure a safe and secure work environment, compliance to government regulations, and allow our employees to voice any concerns while knowing these will be appropriately addressed. Our company is comprised of diverse people and we believe that our diversity enhances our creativity and enriches our work culture. We are committed to good corporate citizenship and intend to always maintain the trust and support of the communities in which our employees work and live.
 
On December 31, 2010, we had approximately 20,400 employees, approximately 2,700 of whom were working under collective bargaining agreements with labor unions and worker representatives. These collective agreements, which cover approximately 14% of our employees, are due to expire at various times through 2014. We have historically renegotiated these agreements without any significant disruption to our operating activities.


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Raw Materials, Suppliers and Seasonality
 
We depend on our extended supply chain for many of the raw materials, components and supplies used in our product and service offerings. We recognize that all supply networks can experience price fluctuations and capacity constraints that put pressure on pricing and lead times. Through our comprehensive supply chain management practices we evaluate our value chain for competitiveness, viability, and overall performance which is an important and integral element of our overarching integrated management system. Our ability to maintain multiple sources of supply for a majority of the items we acquire reduces the risk of potential disruption to our operations. In those instances where we rely on single sources or are engaged in commodity markets with a limited number of suppliers, we attempt to mitigate those perceived risks through long-term agreements and additional supplier oversight. To date, we have not experienced, and do not foresee, significant difficulties in obtaining the materials, components or supplies necessary for our business operations.
 
We do not consider any material portion of our business to be seasonal. Various factors can affect the distribution of our revenue between accounting periods, including the timing of award, the availability of customer funding, product deliveries and customer acceptance.
 
Backlog
 
On December 31, 2010, total backlog was $11.5 billion compared with $10.0 billion at the end of 2009. Approximately 45% of backlog at December 31, 2010, is expected to be converted into revenue in 2011.
 
Total backlog includes both funded backlog (firm orders for which funding is contractually obligated by the customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the customer). Unfunded backlog excludes unexercised contract options and unfunded indefinite delivery indefinite quantity (IDIQ) orders. Backlog is converted into revenue as work is performed or deliveries are made. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Backlog.”
 
Regulation
 
We are heavily regulated in most of the markets we serve. We provide products and services to numerous U.S. Government agencies and entities, including all of the military branches of the DoD, FAA, NASA and intelligence agencies. When working with U.S. agencies and entities, we comply with laws and regulations relating to the creation, administration and performance of contracts. Among other things, these laws and regulations:
 
  •  Require compliance with government standards for contract administration, accounting and management internal control systems;
 
  •  Define allowable and unallowable costs and otherwise govern our right to reimbursement under various flexibly priced U.S. Government contracts;
 
  •  Require certification and disclosure of all cost and pricing data in connection with certain contract negotiations;
 
  •  Impose specific and unique cost accounting practices that may differ from U.S. generally accepted accounting principles (GAAP) and therefore require reconciliation;
 
  •  Require us not to compete for or to divest of work if an organizational conflict of interest, as defined by these laws and regulations, related to such work exists and/or cannot be appropriately mitigated; and
 
  •  Restrict the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data.
 
The U.S. Government may revise its procurement practices or adopt new or revised contract rules and regulations at any time. In order to help ensure compliance with these complex laws and regulations, all of our employees are required to complete ethics training and other compliance training relevant to their respective positions.


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Internationally, we are subject to special U.S. Government laws and regulations, local government regulations and procurement policies and practices (including regulations relating to import-export control, exchange controls, investments, repatriation of earnings and bribery of foreign officials,) and varying economic, political and currency risks.
 
Contracts
 
Generally, the sales price arrangements for our contracts are either fixed-price, cost-plus or time-and-material type. A fixed-price type contract typically offers higher profit margin potential than a cost-plus type or time-and-material type contract, which is commensurate with the greater levels of risk we assume on a fixed-price type contract.
 
On a fixed-price type contract, we agree to perform the contractual statement of work for a predetermined sales price. Although a fixed-price type contract generally permits us to retain profits if the total actual contract costs are less than the estimated contract costs, we bear the risk that increased or unexpected costs may reduce our profit or cause us to sustain losses on the contract. Accounting for the revenue on a fixed-price type contract that is covered by contract accounting standards requires the preparation of estimates of (1) the total contract revenue, (2) the total costs at completion, which is equal to the sum of the actual incurred costs to date on the contract and the estimated costs to complete the contract’s statement of work, and (3) the measurement of progress towards completion. Adjustments to original estimates for a contract’s revenue, estimated costs at completion and estimated total profit or loss are often required as work progresses under a contract, as experience is gained and as more information is obtained, even though the scope of work required under the contract may not change.
 
On a cost-plus type contract, we are paid our allowable incurred costs plus a profit which can be fixed or variable depending on the contract’s fee arrangement up to predetermined funding levels determined by our customers. Cost-plus type contracts with award and incentive fee provisions are our primary variable contract fee arrangement. Award fees provide for a fee based on actual performance relative to contractually specified performance criteria. Incentive fees provide for a fee based on the relationship which total allowable costs bear to target cost.
 
On a time-and-material type contract, we are paid on the basis of direct labor hours expended at specified fixed-price hourly rates (that include wages, overhead, allowable general and administrative expenses and profit) and materials at cost. Therefore, on cost-plus type and time-and-material type contracts we do not bear the risks of unexpected cost overruns, provided that we do not incur costs that exceed the predetermined funded amounts.
 
We believe we have a balanced mix of fixed-price, cost-plus and time-and-material type contracts, a diversified business base and an attractive customer profile with limited reliance on any single contract.
 
The table below presents the percentage of our total revenue generated from each contract-type for the years ended December 31, 2010, 2009, and 2008.
 
                         
    Year Ended December 31,  
Contract-Type
  2010     2009     2008  
 
Fixed Price
    52 %     51 %     53 %
Cost Plus(a)
    48 %     49 %     47 %
                         
Total Revenue
    100 %     100 %     100 %
                         
 
 
(a) Includes time and material contracts.
 
Environmental
 
We are subject to stringent federal, state and local environmental laws and regulations. These are subject to change, which can be difficult to predict reliably and the timing of potential changes is uncertain.


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Environmental requirements significantly affect our operations and we have established an internal program to address our compliance with them.
 
We are responsible, or are alleged to be responsible, for ongoing environmental investigation and remediation of sites in various countries. These are in various stages of investigation and/or remediation and at some of these sites our liability is considered de minimis. We have received notification from the U.S. Environmental Protection Agency (EPA), and from other federal and state agencies, that a number of sites formerly or currently owned and/or operated by us, and other properties or water supplies that may be or have been impacted by 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. Our 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. It can be difficult to estimate reliably the final costs of investigation and remediation due to various factors. In our opinion, the total amount accrued is appropriate based on facts and circumstances as currently known to us. We do not anticipate these liabilities will have a material adverse effect on our combined financial position, results of operations or cash flows. We cannot assure you that other sites, or new details about sites known to us, that could give rise to environmental liabilities with such material adverse effects on us will not be identified in the future.
 
Properties
 
We have 156 locations, in 12 countries on four continents. These properties total 7.0 million square feet, of which 149 locations, or 5.1 million square feet are leased. We consider the many offices, plants, warehouses, and other properties that we own or lease to be in good condition and generally suitable for the purposes for which they are used. The following table shows the significant locations by segment.
 
                 
Location
 
Segment
  Square Footage   Owned/Leased
        (In thousands)    
 
Clifton, New Jersey
  C4ISR     921     Owned
Rochester, New York
  C4ISR     440     Owned
Fort Wayne, Indiana
  C4ISR     302     Leased
Roanoke, Virginia
  C4ISR     251     Owned
Rochester, New York
  C4ISR     250     Leased
Fort Wayne, Indiana
  C4ISR     241     Leased
Rochester, New York
  C4ISR     225     Leased
Van Nuys, California
  C4ISR     168     Leased
Herndon, Virginia
  Information and Technical
Services
    167     Leased
Morgan Hill, California
  C4ISR     160     Leased
Corporate Headquarters
               
McLean, Virginia
  Corporate Headquarters     20     Leased
 
Legal Proceedings
 
We are party to or have property subject to claims and other legal proceedings, including matters arising under provisions relating to the protection of the environment. The extent of our financial exposure cannot in all cases be reasonably estimated at this time. We believe the probability is remote that the outcome of these matters will have a material adverse effect on us as a whole. For information regarding these matters, including current estimates of the amounts that we believe are required for remediation or clean-up see Note 16, “Commitments and Contingencies,” in the Notes to the Combined Financial Statements. While we cannot predict the outcome of these matters, in the opinion of management, any liability arising from them will not have a material adverse effect on our financial position, results of operations or liquidity.


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Other Proceedings
 
On March 27, 2007, ITT reached a settlement relating to an investigation of our Night Vision Division’s compliance with the International Traffic in Arms Regulations (ITAR) pursuant to which ITT pled guilty to two violations, based on the export of defense articles without a license and the omission of material facts in required export reports. ITT was assessed a total of $50 million in fines, forfeitures and penalties. ITT also entered into a Deferred Prosecution Agreement with the U.S. Government which deferred action regarding a third count of violations related to ITAR pending implementation of a remedial action plan, including the appointment of an independent monitor. ITT was also assessed a deferred prosecution monetary penalty of $50 million which is being reduced for monies spent, during the five-year period following the date of the Plea Agreement, to accelerate and further the development and fielding of advanced night vision technology. On April 12, 2011, the Department of Justice dismissed the deferred third count of the Deferred Prosecution Agreement. This dismissal terminates any further obligation of ITT and the Company under the Deferred Prosecution Agreement with the exception of the obligation to fulfill the $50 million deferred prosecution monetary penalty as identified above. Management believes that this matter will not have a material adverse effect on our combined financial position, results of operations or cash flows.


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MANAGEMENT
 
Our Executive Officers
 
The following table sets forth certain information as of June 30, 2011, concerning certain of our executive officers, including a five-year employment history and any directorships held in public companies following the spin-off. Following the spin-off, none of our executive officers will be affiliated with ITT.
 
             
Name
 
Age
 
Position(s)
 
David F. Melcher
    57     President and Chief Executive Officer
Peter J. Milligan
    43     Senior Vice President and Chief Financial Officer
Ann D. Davidson
    59     Senior Vice President, Chief Legal Officer and Corporate Secretary
Christopher C. Bernhardt
    55     Executive Vice President and President of Electronic Systems
Kenneth W. Hunzeker
    58     Executive Vice President and President of Mission Systems
A. John Procopio
    57     Senior Vice President and Chief Human Resources Officer
John E. Shephard, Jr.
    55     Senior Vice President and Chief Strategy and M&A Officer
Michael R. Wilson
    55     Executive Vice President and President of Information Systems
Christopher D. Young
    52     Executive Vice President and President of Geospatial Systems
 
David F. Melcher — Lieutenant General (Ret.) David F. Melcher will serve as our President and Chief Executive Officer and as a Director on our Board of Directors. Mr. Melcher currently serves as President of ITT Defense and Information Solutions and as a corporate Senior Vice President and member of the ITT Strategic Council. Mr. Melcher joined ITT in August 2008 as Vice President of Strategy and Business Development following 32 years of distinguished service in the U.S. Army. Mr. Melcher has more than 20 years of defense community experience in program management, strategy development and finance, working with key decision makers within the Army, Department of Defense, Office of Management and Budget, and Congress. He is a former White House Fellow who currently serves on the Board of Directors of the White House Fellows Foundation and Association, and is a registered professional engineer in the State of New Hampshire. In 2009, he was also selected to serve on the National Defense Industrial Association’s Board of Trustees. Mr. Melcher holds a bachelor’s degree in civil engineering from the U.S. Military Academy at West Point and two masters’ degrees, including one in business administration from Harvard University and another in public administration from Shippensburg University. Mr. Melcher has extensive international strategic business, budget, policymaking and defense-related experience, has demonstrated leadership and management experience with the U.S. Army, and has served as the Army’s Military Deputy for Budget and Deputy Chief of Staff for Programs in the Pentagon, and as Commander of the Corps of Engineers.
 
Peter J. Milligan — Peter J. Milligan will serve as our Senior Vice President and Chief Financial Officer. Mr. Milligan currently serves as Vice President and Chief Financial Officer for ITT Defense and Information Solutions. Previously, he served as the Vice President and Controller for ITT’s electronic systems business, and prior to that, led ITT’s investor relations organization. Before joining ITT in 2006, Mr. Milligan was Vice President of finance for AT&T, where he led the investor relations function. He began his career in public accounting at Price Waterhouse and Arthur Andersen. He holds a master of business administration from New York University with a concentration in finance and economics, a master’s degree in taxation from Seton Hall University and a bachelor’s degree in business administration in accounting from Hofstra University.
 
Ann D. Davidson — Ann D. Davidson will serve as our Senior Vice President, Chief Legal Officer and Corporate Secretary. Ms. Davidson is currently Vice President, Corporate Responsibility for ITT. She joined ITT


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in May 2007 as Vice President and General Counsel of ITT’s Defense and Information Solutions group. Shortly thereafter she was named ITT’s Chief Ethics and Compliance Officer and, in November 2009 she was elected a corporate Vice President. Prior to joining ITT, Ms. Davidson held executive legal positions in several companies, including Thales North America, Inc., Parker Hannifin Corporation and Honeywell Inc. She was Senior Vice President, General Counsel and Corporate Secretary for Alliant Techsystems Inc. and was Vice President, General Counsel and Corporate Secretary for Power Control Technologies, Inc. Earlier in her career, she was in private practice with a law firm and served as an attorney for the U.S. Department of the Navy. She graduated cum laude from the University of Dayton’s School of Law and holds a bachelor’s degree in political science from Ohio University.
 
Christopher C. Bernhardt — Christopher C. Bernhardt will serve as our Executive Vice President and President of Electronic Systems. Mr. Bernhardt is currently the President of ITT Electronic Systems. Mr. Bernhardt has more than 30 years of experience in the defense, aerospace and commercial electronics industries. Mr. Bernhardt has also served in a dual role from 2006 to 2008 as ITT Defense Vice President of Strategy/M&A and Business Development. Prior to ITT, Mr. Bernhardt served in executive leadership positions with General Electric Aerospace & Defense; Smiths Industries; Allied Signal as President Guidance and Controls; Litton Industries as President, Data and C3 Systems; and Stellex Technologies as Chairman, President and CEO. He is a member or AUSA, the Strategic Advisory Board of the Journal of Electronic Defense (JED), Navy league, Air Force Association, Association of Old Crows (AOC), Army Aviation Association of America, and the USMC Scholarship Association. Mr. Bernhardt holds a bachelor’s degree in science electrical engineering from Duke University and a master of business administration in finance and marketing from Hofstra University. He is a graduate of ITT’s Ashridge Management College, Wharton’s Executive Finance Program and is a certified Value Based Six Sigma Green Belt.
 
Kenneth W. Hunzeker — Lieutenant General (Ret.) Kenneth W. Hunzeker will serve as our Executive Vice President and President of Mission Systems. Mr. Hunzeker is currently the President and General Manager of ITT Mission Systems. Prior to heading ITT Mission Systems, he joined ITT as Vice President, Government Relations for ITT Defense and Information Solutions after 35 years of distinguished service in the U.S. Army. In that position he was responsible for shaping ITT Defense and Information Solutions. Mr. Hunzeker has more than 20 years of defense community experience in program management, strategy development and finance, working with key decision makers within the Army, Department of Defense, Office of Management and Budget, and Congress. Most recently he served as Deputy Commander, United States Forces — Iraq. During a previous tour, he commanded the Civilian Police Transition Team responsible for training and equipping over 400,000 Iraqi security forces. He also served as the Vice Director for Force Structure, Resources and Assessment, J-8, The Joint Staff, Washington, D.C. and commanded the 1st Infantry Division as well as 5th U.S. Corps, both in U.S. Army Europe. Mr. Hunzeker holds a bachelor’s degree from the U.S. Military Academy at West Point and two masters’ degrees, including one in systems technology (command control and communications).
 
Dr. A. John Procopio — Dr. A. John Procopio will serve as our Senior Vice President and Chief Human Resources Officer. Dr. Procopio is currently Vice President and Director of Human Resources for ITT Corporation, as well as the Vice President and Director of Human Resources for ITT Defense and Information Solutions. He was elected an ITT Vice President in April 2011. He was named to the Defense and Information Solutions position in February 2003. Previously, Dr. Procopio held the position of Chief Learning Officer of ITT Corporation. Dr. Procopio joined ITT in 1983 as an Assistant Manager of Training and Development and assumed positions of increasing responsibility before becoming Director of the Total Quality Management group in 1993. He was formerly Vice President, Director Human Resources, N.A. Division at ITT Sheraton Corporation. In 1995, he was promoted to Director, Human Resources and Executive Compensation for ITT Industries, Inc. where he had responsibilities for human resources activities including: executive development, executive compensation, executive staffing, headquarters staffing, diversity, training and development, policy administration and continuity planning. Dr. Procopio holds a bachelor’s degree in education from Mansfield University, a master’s degree in education from Temple University and a doctorate in education administration from the University of Bridgeport.
 
John E. Shephard, Jr. — John E. Shephard, Jr. will serve as our Senior Vice President and Chief Strategy and M&A Officer. Mr. Shephard is currently the Vice President, Business Development and Strategy for ITT Defense and Information Solutions. He joined ITT in April 2009. Prior to joining ITT he was CEO of Pallas-


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Athena Group based in Williamsburg, Virginia, where he provided strategic, financial, and operations consultation to clients. Previously, he was President, Newport News Industrial Corporation and Senior Vice President, Operations, Northrop Grumman-Newport News. Prior to that he served in a variety of leadership roles at Newport News Shipbuilding, Inc., in Newport News, Virginia, to include Vice President, Manufacturing and Materials; Vice President, Strategy and Process Innovation; and Director, Strategic Planning. Mr. Shephard began his work in industry following a distinguished military career, which included combat duty in Desert Storm, a NASA leadership post and a teaching assignment at the U.S. Military Academy. Mr. Shephard holds a Master’s degree in political science from the Massachusetts Institute of Technology. He earned his bachelor’s degree in civil engineering from the U.S. Military Academy at West Point. He was also selected to the prestigious White House Fellow program. In 1999, the American Society of Engineering Management honored him as Engineering Manager of the Year.
 
Michael R. Wilson — Michael R. Wilson will serve as our Executive Vice President and President of Information Systems. Mr. Wilson is currently the President of ITT Information Systems. Appointed to this position in January 2010, he is responsible for all aspects of the Information Systems business including performance, strategy, leadership and customer relations. Mr. Wilson joined ITT in 1986 and has held a succession of increasingly responsible technical and management positions with the company. Prior to his current position, he served as President of ITT’s Advanced Engineering & Sciences business. Prior to that, he was Vice President of ITT’s Communications, Intelligence and Information systems business unit where he led the business in providing advanced information and network solutions to the FAA, NASA and other government customers. Mr. Wilson is a Value Based Six Sigma (VBSS) certified Champion and has completed executive strategic management program at Ashridge Management College. Mr. Wilson began his career with four years of service in the United States Air Force and holds a bachelor’s degree in electrical engineering from the Pennsylvania State University.
 
Christopher D. Young — Christopher D. Young will serve as our Executive Vice President and President of Geospatial Systems. Mr. Young is currently President and General Manager of ITT Geospatial Systems. Previously, Mr. Young was President and General Manager of ITT Space Systems Division, a position held since April 2006. Prior to this position, Mr. Young served as Vice President and Director for ITT Space Systems’ Commercial & Space Sciences group in Fort Wayne, Indiana. In 2003, he was named Director, Space Programs for ITT Aerospace/Communications Division. He served in a series of managerial and project engineering positions before he was named Director of Space Engineering for Aerospace/Communications Division in 2001. Mr. Young first joined the company’s Aerospace/Communications Division in 1982. Mr. Young is a member of the Aerospace Industries Association (AIA) and the National Space Club. Mr. Young holds a bachelor’s degree in electrical engineering from The Ohio State University, and has taken graduate studies in the master of business administration program at Indiana University.
 
Our Board of Directors
 
The following table sets forth information with respect to those persons who are expected to serve on our Board of Directors following the spin-off. See “— Our Executive Officers” for Mr. Melcher’s biographical information. We are in the process of identifying additional individuals who will become directors following the spin-off. Following the spin-off, Christina A. Gold and Paul J. Kern will continue to serve on the Board of Directors of ITT until mid-2013. None of Ralph F. Hake, David F. Melcher, Steven R. Loranger and John J. Hamre will serve on the Board of Directors of ITT following the spin-off.
 
             
Name
 
Age
 
Position(s)
 
Ralph F. Hake
    62     Chairman
Christina A. Gold
    63     Director
John J. Hamre
    60     Director
Paul J. Kern
    65     Director
Steven R. Loranger
    59     Director
David F. Melcher
    57     Director


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Ralph F. Hake — Ralph F. Hake will serve as Chairman on our Board of Directors. Mr. Hake has been a Director of ITT since 2002 and will resign that position at the time of the spin-off. Mr. Hake was Chairman and Chief Executive Officer of Maytag Corporation from June of 2001 to March of 2006. Mr. Hake has extensive global management and financial experience. He served as Executive Vice President and Chief Financial Officer for Fluor Corporation, an engineering and construction firm from 1999 to 2001. From 1987 to 1999, Mr. Hake served in various executive capacities at Whirlpool Corporation, including Chief Financial Officer and Senior Executive Vice President for Global Operations. Mr. Hake also served on the Board of Directors for the National Association of Manufacturers and was Chairman of the group’s taxation and economic policy group. He has served as a Director of Owens-Corning Corporation since 2006 and was previously a Director of Maytag Corporation from June 2001 through March 2006. Mr. Hake served as non-executive Chairman of Smurfit-Stone from 2010 until its acquisition by RockTenn Co. on May 28, 2011, on which date he became a Director of RockTenn Co. Mr. Hake is business and economics graduate of the University of Cincinnati and holds a master of business administration from the University of Chicago. Mr. Hake has extensive global management and financial experience. Mr. Hake has also served as a Director of other public companies providing additional relevant experience.
 
Christina A. Gold — Christina A. Gold will serve as a Director on our Board of Directors. Mrs. Gold has been a Director of ITT since 1997. Mrs. Gold was President and Chief Executive Officer of The Western Union Company, a leading company in global money transfer, from September of 2006 to September of 2010. From May 2002 to September 2006, Mrs. Gold was President of Western Union Financial Services, Inc. and Senior Executive Vice President of Western Union’s parent company, First Data Corporation. From October 1999 to May 2002, she was Chairman, President and Chief Executive Officer of Excel Communications, Inc. Mrs. Gold served as President and Chief Executive Officer of The Beaconsfield Group from March 1998 to October 1999. From 1997 to 1998, Mrs. Gold was Executive Vice President of Global Development of Avon Products, Inc., and from 1993 to 1997, she was President of Avon North America. Mrs. Gold has served as Director of The Western Union Company since 2006. Mrs. Gold has also served as a Director of New York Life Insurance Company since 2001, a mutual company, and previously served as a Director of Torstar Corporation, a broad-based Canadian media company. She serves as a Director of New York Life Insurance, a mutual company. Mrs. Gold is a graduate of Carleton University. Mrs. Gold has extensive experience in leadership positions with wide-ranging global leadership, management and marketing organizations. Mrs. Gold has also served as a Director of other public companies providing additional relevant experience.
 
John J. Hamre — John J. Hamre will serve as a Director on our Board of Directors. Dr. Hamre has been a Director of ITT since 2000 and will resign that position at the time of the spin-off. Dr. Hamre was elected President and Chief Executive Officer of Center for Strategic & International Studies (“CSIS”), a public policy research institution dedicated to strategic, bipartisan global analysis and policy impact, in April of 2000. Prior to joining CSIS, he served as U.S. Deputy Secretary of Defense from 1997 to 2000 and Under Secretary of Defense (Comptroller) from 1993 to 1997. Dr. Hamre is a Director of MITRE Corporation, a not-for-profit organization chartered to work in the public interest, with expertise in systems engineering, information technology, operational concepts, and enterprise modernization. Dr. Hamre has extensive strategic and international experience, particularly with respect to defense-related businesses. He has served as a Director of SAIC, Inc. since 2005 and Oshkosh Corporation since 2009. Dr. Hamre was previously a Director of Choicepoint, Inc. from May 2002 through September 2008. Following the spin-off of Xylem, Dr. Hamre is expected to serve on its Board of Directors. He holds a bachelor’s degree, with highest distinction, from Augustana College in Sioux Falls, South Dakota, was a Rockefeller Fellow at Harvard Divinity School and was awarded a Ph.D., with distinction, from the School of Advanced International Studies, Johns Hopkins University. Dr. Hamre has extensive strategic and international experience, particularly with respect to defense related businesses. Dr. Hamre has also served as a Director of other public companies providing additional relevant experience.
 
Paul J. Kern — General Paul J. Kern, U.S. Army (Ret.) will serve as a Director on our Board of Directors. Mr. Kern has been a Director of ITT Corporation since August 2008. Mr. Kern has served as a Senior Counselor to the Cohen Group since January 2005. He served as President and Chief Operating Officer of AM General LLC from August of 2008 to January of 2010. In November 2004, Mr. Kern retired from the U.S. Army


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as Commanding General, Army Materiel Command (AMC). Mr. Kern graduated from the U.S. Military Academy at West Point. Mr. Kern serves on the Board of Directors of CoVant Technologies LLC, and AT Solutions, a subsidiary of CoVant Technologies. Mr. Kern is a member of the Defense Science Board and National Academy of Engineering. He has served as a Director of iRobot Corporation since 2006. Mr. Kern was a Director of EDO Corporation from 2005 through 2007. The Company acquired EDO Corporation on December 20, 2007. He was a director of Anteon Corporation from 2005 until 2006 when it was sold to General Dynamics. He holds masters’ degrees in both civil and mechanical engineering from the University of Michigan, and he was a Senior Security Fellow at the John F. Kennedy School at Harvard University. Mr. Kern has extensive international strategic business and defense-related experience, has demonstrated leadership and management experience with the U.S. Army, and is a leading figure on defense transformation. Mr. Kern has also served as a Director of other public companies providing additional relevant experience.
 
Steven R. Loranger — Steven R. Loranger will serve as a Director on our Board of Directors. Mr. Loranger currently serves as President, Chief Executive Officer and Chairman of the Board of Directors of ITT, and has been a Director of ITT since 2004 and will resign that position at the time of the spin-off. Mr. Loranger is a member of the Business Roundtable, serves on the boards of the National Air and Space Museum and the Congressional Medal of Honor Foundation and is on the Executive Committee of the Aerospace Industries Association Board of Governors. Prior to ITT, Mr. Loranger previously served as Executive Vice President and Chief Operating Officer of Textron, Inc. from 2002 to 2004, overseeing Textron’s manufacturing businesses, including aircraft and defense, automotive, industrial products and components. From 1981 to 2002, Mr. Loranger held executive positions at Honeywell International Inc. and its predecessor company, AlliedSignal, Inc., including serving as President and Chief Executive Officer of its Engines, Systems and Services businesses. Following the spin-off of Xylem, Mr. Loranger is expected to serve on its Board of Directors. Mr. Loranger holds a bachelor’s and master’s degree in science from the University of Colorado. Mr. Loranger has extensive operational and manufacturing experience with industrial companies and, in particular, he has intimate knowledge of the Company’s business and operations having served as Chief Executive Officer of ITT since 2004. Mr. Loranger also serves as a Director on the Board of FedEx Corporation, providing additional relevant experience.
 
Structure of the Board of Directors
 
Our Board of Directors will be divided into three classes that will be, as nearly as possible, of equal size. The initial terms of the Class I, Class II and Class III directors will expire at the annual meeting in 2012, 2013 and 2014, respectively, and in each case, when any successor has been duly elected and qualified. Upon the expiration of each initial term, directors will subsequently serve three-year terms if renominated and reelected. The proposed Class I directors will include Ralph F. Hake and David F. Melcher, the proposed Class II directors will include Christina A. Gold and Steven R. Loranger, and the proposed Class III directors will include Paul J. Kern and John. J. Hamre.
 
Pursuant to the Distribution Agreement, we have agreed that Exelis shall nominate a slate of directors to be elected at our shareholder meeting to be held in 2013 and each year thereafter so that (i) a majority of the Board of Directors shall consist of persons who had not served as a director or executive officer of ITT at any time during the twelve month period immediately prior to the distribution (each, a “Legacy Director”) and (ii) no director of Exelis that is a Legacy Director shall also be a director of ITT, including any Legacy Director who would be nominated to serve as a director of ITT at its shareholder meeting to be held in 2013.
 
Committees of the Board of Directors
 
Following the spin-off, the standing committees of our Board of Directors will include an Audit Committee, a Compensation and Personnel Committee and a Nominating and Governance Committee each as further described below. Following our listing on the NYSE and in accordance with the transition provisions of the rules of the NYSE applicable to companies listing in conjunction with a spin-off transaction, each of these committees will, by the date required by the rules of the NYSE, be composed exclusively of directors who are independent. Other committees may also be established by the Board of Directors from time to time.


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Audit Committee.  The members of the Audit Committee are expected to be Christina A. Gold (chair), Ralph F. Hake and Paul J. Kern. The Audit Committee will have the responsibility, among other things, to meet periodically with management and with both our independent auditor and internal auditor to review audit results and the adequacy of and compliance with our system of internal controls. In addition, the Audit Committee will appoint or discharge our independent auditor, and review and approve auditing services and permissible non-audit services to be provided by the independent auditor in order to evaluate the impact of undertaking such added services on the independence of the auditor. The responsibilities of the Audit Committee, which are anticipated to be substantially identical to the responsibilities of ITT’s Audit Committee, will be more fully described in our Audit Committee charter. The Audit Committee charter will be posted on our website and will be available in print to any shareholder who requests it. By the date required by the transition provisions of the rules of the NYSE, all members of the Audit Committee will be independent and financially literate. Further, the Board of Directors has determined that Ms. Gold, Mr. Hake and Mr. Kern possess accounting or related financial management expertise within the meaning of the NYSE listing standards and that each qualifies as an “audit committee financial expert” as defined under the applicable SEC rules.
 
Compensation and Personnel Committee.  The members of the Compensation and Personnel Committee are expected to be Paul J. Kern (chair), Ralph F. Hake and John J. Hamre. The Compensation and Personnel Committee will oversee all compensation and benefit programs and actions that affect our senior executive officers. The Compensation and Personnel Committee will also provide strategic direction for our overall compensation structure, policies and programs and will oversee and approve the continuity planning process. The responsibilities of the Compensation and Personnel Committee, which are anticipated to be substantially identical to the responsibilities of ITT’s Compensation and Personnel Committee, will be more fully described in the Compensation and Personnel Committee charter. The Compensation and Personnel Committee charter will be posted on our website and will be available in print to any shareholder who requests it. Each member of the Compensation and Personnel Committee will be a non-employee director and there are no Compensation and Personnel Committee interlocks involving any of the projected members of the Compensation and Personnel Committee.
 
Nominating and Governance Committee.  The members of the Nominating and Governance Committee are expected to be John J. Hamre (chair), Paul J. Kern and Steven R. Loranger. The Nominating and Governance Committee will be responsible for developing and recommending to the Board of Directors criteria for identifying and evaluating director candidates; identifying, reviewing the qualifications of and proposing candidates for election to the Board of Directors; and assessing the contributions and independence of incumbent directors in determining whether to recommend them for reelection to the Board of Directors. The Nominating and Governance Committee will also review and recommend action to the Board of Directors on matters concerning transactions with related persons and matters involving corporate governance and, in general, oversee the evaluation of the Board of Directors. The responsibilities of the Nominating and Governance Committee, which are anticipated to be substantially identical to the responsibilities of ITT’s Nominating and Governance Committee, will be more fully described in the Nominating and Governance Committee charter. The Nominating and Governance Committee charter will be posted on our website and will be available in print to any shareholder who requests it.
 
Director Independence.  Our Board of Directors, upon recommendation of our Nominating and Governance Committee, is expected to formally determine the independence of its directors following the spin-off. The Board of Directors of ITT has affirmatively determined that the following directors, who are anticipated to be elected to our Board of Directors, are independent: Ralph F. Hake, John J. Hamre, Christina A. Gold and Paul J. Kern. Our Board of Directors is expected to annually determine the independence of directors based on a review by the directors and the Nominating and Governance Committee. No director will be considered independent unless the Board of Directors determines that he or she has no material relationship with us, either directly or as a partner, shareholder, or officer of an organization that has a material relationship with us. Material relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable, and familial relationships, among others. To evaluate the materiality of any such relationship, the Board of Directors has determined it is in the best interests of the company to adopt categorical independence standards


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which will be set forth in the Corporate Governance Guidelines. The standards that will be relied upon by the Board of Directors in affirmatively determining whether a director is independent are composed, in part, of those objective standards set forth in the NYSE rules, which generally provide that:
 
  •  A director who is an employee, or whose immediate family member (defined as a spouse, parent, child, sibling, father- and mother-in-law, son- and daughter-in-law, brother- and sister-in-law and anyone, other than a domestic employee, sharing the director’s home) is an executive officer, of the company, would not be independent until three years after the end of such relationship.
 
  •  A director who receives, or whose immediate family member receives, more than $120,000 per year in direct compensation from the company, other than director and committee fees and pension or other forms of deferred compensation for prior services (provided such compensation is not contingent in any way on continued service) would not be independent until three years after ceasing to receive such amount.
 
  •  A director who is a partner of or employed by, or whose immediate family member is a partner of or employed by and personally works on the company’s audit, a present or former internal or external auditor of the company would not be independent until three years after the end of the affiliation or the employment or auditing relationship.
 
  •  A director who is employed, or whose immediate family member is employed, as an executive officer of another company where any of the company’s present executives serve on the other company’s compensation committee would not be independent until three years after the end of such service or employment relationship.
 
  •  A director who is an employee, or whose immediate family member is an executive officer, of a company that makes payments to, or receives payments from, the company for property or services in an amount which, in any single fiscal year, exceeds the greater of $1 million, or 2% of such other company’s consolidated gross revenues, would not be independent until three years after falling below such threshold.
 
Compensation of Non-Employee Directors
 
Following the spin-off, director compensation will be determined by our Board of Directors with the assistance of its Nominating and Governance Committee. It is anticipated that such compensation will consist of an annual retainer, an annual equity award, annual fees for serving as an Audit Committee chair and other types of compensation.
 
Director Compensation Table
 
The following table sets forth information concerning the 2010 compensation awarded by ITT to non-employee directors of ITT who are expected to be non-employee directors of Exelis. The table below represents the 2010 grant date fair value of compensation computed in accordance with GAAP. All non-employee directors received the same cash, stock, and options awards for service as a non-employee director. Mr. Loranger, as an employee director, did not receive compensation of his service on the ITT Board of Directors. The grant date fair value of stock awards and option awards granted to non-employee directors in 2010 is provided in footnote (b) to the table. Stock awards are composed of restricted stock units. Option awards are composed of non-qualified stock options.
 
                                 
    Fees Earned or
  Stock
       
    Paid in Cash
  Awards
  Option Awards
  Total
Name
  $(a)   ($)(b)   ($)(b)   ($)
 
Ralph F. Hake
    90,000       90,192       40,126       220,318  
John J. Hamre
    90,000       90,192       40,126       220,318  
Christina A. Gold
    90,000       90,192       40,126       220,318  
Paul J. Kern
    90,000       90,192       40,126       220,318  


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(a) Fees earned were paid, at the election of the director, in cash or deferred cash. Non-employee directors could have irrevocably elected deferral into an interest-bearing cash account or an account that tracks an index of ITT’s stock.
 
(b) Awards reflect the grant date fair value computed in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 718, Stock Compensation. Non- employee directors do not receive differing amounts of equity compensation, the grant date fair value for restricted stock units was $52.59 and was determined on May 11, 2010, the date of the ITT’s 2010 Annual Meeting. The grant price reflects the closing price of ITT stock on the grant date. The grant date fair value of non-qualified stock options was $14.03, determined on March 5, 2010, the date on which director stock options were awarded.
 
The following table represents restricted common stock and stock options outstanding as of December 31, 2010 awarded by ITT to non-employee directors of ITT who are expected to be non-employee directors of Exelis. Outstanding restricted common stock awards include unvested restricted stock units and vested but deferred restricted stock units.
 
Restricted Common Stock and
Stock Option Awards Outstanding at 2010 Fiscal Year-End
 
                 
    Outstanding
  Outstanding
    Restricted Common
  Stock Option
Name
  Stock Awards   Awards
 
Ralph F. Hake
    10,466       22,570  
John J. Hamre
    14,224       26,130  
Christina A. Gold
    23,026       26,130  
Paul J. Kern
    3,910       9,050  


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EXECUTIVE COMPENSATION
 
Compensation Discussion and Analysis
 
Introduction
 
We are currently a wholly owned subsidiary of ITT, which will, following the spin-off, own the subsidiaries that currently conduct the operations of the Defense and Information Solutions segment of ITT. Therefore, our historical compensation strategy has been primarily determined by the Compensation and Personnel Committee of ITT’s Board of Directors (the “ITT Compensation Committee”), which approves and oversees administration of ITT’s executive compensation program. Since the information presented in this document relates primarily to the 2010 fiscal year, which ended on December 31, 2010, this Compensation Discussion and Analysis focuses primarily on ITT’s compensation programs and decisions with respect to 2010, describing all elements of ITT’s executive compensation program as determined by the ITT Compensation Committee. This Compensation Discussion and Analysis also describes the ways in which we anticipate that our compensation philosophy will differ from that of ITT’s after we become a separate public company. As explained under “The Spin-off — Reasons for the Spin-Off,” separation from ITT will provide us with the flexibility to establish appropriate compensation policies to attract, motivate and retain our executives. We will form our own Compensation Committee (the “Exelis Compensation Committee”) that will be responsible for our executive compensation programs prospectively, which may be different from the compensation programs in place for 2010.
 
This Compensation Discussion and Analysis describes ITT’s compensation philosophy for those individuals who are expected to be the most highly compensated Exelis executive officers based on their fiscal 2010 compensation with ITT. These officers are referred to herein as Named Executive Officers (“NEOs”) and Exelis also is referred to as “we”, “us” or “our.” Our named executives are David F. Melcher, who is expected to be Chief Executive Officer and was Senior Vice President and President, Defense and Information Solutions of ITT; Peter J. Milligan, who is expected to be Chief Financial Officer and was Vice President, Chief Financial Officer, Defense and Information Solutions of ITT; Christopher C. Bernhardt, who is expected to be President of Electronic Systems and was President, Electronic Systems of ITT; Michael R. Wilson, who is expected to be President of Information Systems and was President, Information Systems of ITT; and Christopher D. Young, who is expected to be President and General Manager of Geospatial Systems and was President, Geospatial Systems of ITT.
 
Our Executive Compensation Program
 
Overall compensation policies and programs
 
Historically.  In 2010, the ITT Compensation Committee retained Pay Governance LLC as its independent compensation consultant (“Pay Governance” or the “Compensation Consultant”). Pay Governance provides independent consulting services in support of the ITT Compensation Committee’s charter. The Compensation Consultant also provided independent consulting services in support of ITT’s Nominating and Governance Committee’s charter, including providing competitive data on director compensation. The Compensation Consultant’s engagement leader provided objective expert analyses, assessments, research and recommendations for executive employee compensation programs, incentives, perquisites, and compensation standards. In this capacity, the Compensation Consultant provided services that related solely to work performed for and at the direction of ITT’s Compensation Committee including analysis of material prepared by ITT for ITT’s Compensation Committee’s review. In 2010, ITT’s human resources, finance and legal departments supported the work of the ITT Compensation Committee, provided information, answered questions and responded to requests. Additionally, the Compensation Consultant provided analyses to ITT’s Nominating and Governance Committee and the full Board of Directors on Non-Management Director compensation. The Compensation Consultant provided no other services to ITT during 2010.
 
In 2010, as in past years, the ITT Compensation Committee looked to competitive market compensation data for companies comparable to ITT to establish overall policies and programs that address executive compensation, benefits and perquisites. This review included analysis of the Towers Watson Compensation


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Data Bank (“CDB”) information provided by the Compensation Consultant. The analyses used a sample of 174 companies from the S&P® Industrials Companies that were available in the CDB. The compensation data from these companies were evaluated by the Compensation Consultant for differences in the scope of operation as measured by annual revenue. Appendix A at the end of this section lists the sample of companies from the S&P® Industrials Companies that were used in the CDB analyses. The ITT Compensation Committee believes that these 174 companies most closely reflect the labor market in which ITT competes for talent.
 
The ITT Compensation Committee has delegated to ITT’s Senior Human Resources Executive responsibility for administering the executive compensation program. During 2010, ITT’s Chief Executive Officer and Senior Human Resources Executive made recommendations to the ITT Compensation Committee regarding executive compensation actions and incentive awards. Mr. Melcher was an NEO of ITT in 2010. The ITT Compensation Committee reviewed each compensation element for Mr. Melcher and made the final determination regarding executive compensation for him using the processes described for ITT in this Compensation Discussion and Analysis. With respect to Messrs. Bernhardt, Wilson and Young, Mr. Melcher, in his role as President of Defense and Information Solutions for ITT made recommendations to the Chairman, President and Chief Executive Officer of ITT regarding executive compensation for these officers and, after discussing Mr. Melcher’s recommendations, the final executive compensation determinations were made jointly by Mr. Melcher and the Chairman, President and Chief Executive Officer of ITT. With respect to the executive compensation of Mr. Milligan, Mr. Melcher in his role as President of Defense and Information Solutions for ITT made recommendations to both the Chairman, President and Chief Executive Officer of ITT and to ITT’s Senior Vice President and Chief Financial Officer, and after discussing Mr. Melcher’s recommendations, Mr. Milligan’s final executive compensation determination was made jointly by Mr. Melcher, the Chairman, President and Chief Executive Officer of ITT and ITT’s Senior Vice President and Chief Financial Officer. The ITT Compensation Committee also approved the 2010 long-term incentive awards for the NEOs. The ITT Compensation Committee believes ITT’s compensation programs reflect ITT’s overarching business rationale and are designed to be reasonable, fair, fully disclosed, and consistently aligned with long-term value creation. The ITT Compensation Committee further believes this compensation philosophy encourages individual and group behaviors that balance risk and reward and assist ITT in achieving steady, sustained growth and earnings performance.
 
Going Forward.  Following the separation, it is expected that the Exelis Compensation Committee will retain a compensation consultant and the nature and scope of the compensation consultant’s engagement will be similar to that of ITT’s Compensation Consultant. In addition, we expect to establish a similar executive compensation philosophy with respect to our NEOs following the separation. We expect that our compensation objective will be to implement compensation programs that reflect an overarching business rationale and are designed to be reasonable, fair, fully disclosed, and consistently aligned with long-term value creation. We also expect that the Exelis Compensation Committee will delegate to a senior Human Resources executive responsibility for administering the Executive Compensation program.
 
Individual executive positions
 
Historically.  ITT’s senior management positions, including each of its NEO positions, were compared to positions with similar attributes and responsibilities based on the CDB information. This information was used to provide the market median dollar value for annual base salary, annual incentives and long-term incentives. Compensation levels within approximately 10% above or below the market median dollar value are considered by the Compensation Consultant and the ITT Compensation Committee to be within the market median range. The ITT Compensation Committee used the CDB information, along with other qualitative information, described below, in making its determination of target and actual compensation provided to each of ITT’s NEOs. The ITT Compensation Committee may consider deviations from the market median range depending on a position’s strategic value, ITT’s objectives and strategies, and individual experience and performance in the position. The ITT Compensation Committee may, but is not required to, consider prior year’s compensation, including short-term or long-term incentive payouts, restricted stock vesting or option exercises in compensation decisions for the NEOs.


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The following chart sets out 2010 total target NEO compensation for annual base salary, annual incentive, long-term incentive and total compensation relative to the market median dollar value. For Messrs. Melcher, Bernhardt, Wilson and Young, deviations below the market median range were primarily related to the relatively short tenure of each of these executives in their current positions. Mr. Melcher joined ITT in 2008. Messrs. Bernhardt, Wilson and Young were each promoted as part of ITT’s strategic realignment of its Defense business in January of 2010. As part of this strategic realignment, Defense value centers (“Value Centers”), which are one level below the Group or business segment level, were consolidated and Messrs. Bernhardt, Wilson and Young were named as presidents of their respective Defense Value Centers. Although Mr. Milligan was promoted to his current position as Chief Financial Officer of the Defense business segment in August of 2010, his compensation reflects the current market median for his position.
 
                 
        Annual Incentive
       
    Annual Base Salary
  Target
  Long-Term Incentive
  Total Compensation
    Position as Percentage
  Position as Percentage
  Position as Percentage
  Position as Percentage
Named Executive Officer
  of Market Median
  of Market Median
  of Market Median
  of Market Median
and Title
  Dollar Value   Dollar Value   Dollar Value   Dollar Value
 
David F. Melcher,
Chief Executive Officer (formerly Senior Vice President and President, Defense and Information Solutions of ITT)
  91%   83%
(Below market median
range)
  70%
(Below market median
range)
  77%
(Below market median
range)
Peter J. Milligan,
Chief Financial Officer (formerly Vice President, Chief Financial Officer, Defense and Information Solutions of ITT)
  107%   105%   96%   105%
Christopher C. Bernhardt,
President of Electronic Systems (formerly President, Electronic Systems of ITT)