Exhibit 99.1

 

     , 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.

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

 

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.

 

 

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.

 

TABLE OF CONTENTS

 

 

SUMMARY

	•	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 “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.

	•	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 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.

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.”

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

		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.

		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?

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.”

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:

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

		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,

		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

		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

		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.

		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.

 

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,

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.

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

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.

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.

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.

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

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.

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.

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

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

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

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.

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:

 

 

 

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

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.

 

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.

 

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:

 

 

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.

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:

 

 

 

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.

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:

 

 

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.

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:

 

 

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:

 

 

 

Under certain circumstances ITT would recognize taxable gain on the distribution. These circumstances would include the following:

 

 

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

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

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:

 

 

 

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.

 

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

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:

 

 

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:

 

 

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.

 

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.

 

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.

 

 

 

 

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.

 

 

 

 

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 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

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:

 

 

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.

PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2011

 

PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 2010

 

PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2011

 

NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

 

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

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:

 

 

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

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:

 

 

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:

 

 

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-

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.

DISCUSSION OF FINANCIAL RESULTS

 

Combined Operating Results

 

Selected financial highlights are presented in the table below:

 

 

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:

 

 

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

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

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:

 

 

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.

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.

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.

 

 

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.