Exelis reports second-quarter 2014 financial results

Exelis (NYSE: XLS) reported financial results for the second quarter of 2014. Second-quarter revenue was $1.1 billion, an 11 percent decrease from the second quarter of 2013, and second-quarter earnings were $61 million, or $0.32 per share, a 22 percent decrease from the second quarter of 2013. Adjusted earnings, which exclude costs related to the pending spin-off of the current Exelis Mission Systems business into an independent company that will be known as Vectrus, were $0.34 per share, a 17 percent decrease from the same period in 2013. Exelis generated $174 million in free cash flow during the quarter and returned $49 million to shareholders via dividends and share buybacks.

The company secured $1.2 billion in funded orders during the second quarter of 2014, including significant new business in several of its strategic growth platforms, along with orders from a variety of international customers. Key contract announcements in the quarter included:

• A contract awarded by NASA worth up to $208 million to build a satellite payload that will improve scientific understanding of climate change
• Securing positions on the EAGLE and OASIS IDIQ contract vehicles
• A $25 million contract to deliver five additional infrared sensing systems for use on the Gorgon Stare program
• Contract awards from NATO, the U.S. Army and General Dynamics – U.K. for communication equipment and support
• A multimillion dollar contract award from Airbus to supply composite floor beam struts for the A380 aircraft

“New business, which included contracts in several of our strategic growth platforms, remained strong in the second quarter and we continue to work toward the spin-off of Mission Systems, which we expect to complete later this summer or early fall,” said Exelis CEO and President David F. Melcher. "While encouraged by our business performance, we continue to see significant contraction in our Afghanistan programs, and as a result, we are adjusting our full-year expectations to account for this trend."

Segment Results

C4ISR Electronics and Systems

C4ISR Electronics and Systems second-quarter 2014 revenue was $523 million, up one percent from the same period in 2013 due to sales of airborne electronic warfare equipment and counter-IED jammer products, partially offset by volume declines in domestic tactical radios. Segment adjusted operating income for the quarter was $64 million, an increase of 60 percent from the second quarter of 2013, due to improved revenue mix and lower restructuring and pension expenses.

Information and Technical Services

Information and Technical Services second-quarter 2014 revenue was $594 million, a decrease of 19 percent from the same period in 2013, driven by lower customer activity on U.S. government contracts in Afghanistan, partially offset by an increase in professional and engineering services programs. Second-quarter adjusted operating income for the segment was $47 million, down 46 percent from the same period in 2013, primarily due to favorable contract modifications in 2013.

Mission Systems Spin-off

The company continues to progress through regulatory and legal requirements for the scheduled spin-off of its current Mission Systems business into an independent, publicly traded company that will be known as Vectrus. The most current public information on the Mission Systems spin-off can be found at www.exelisinc.com/transformation.

2014 Guidance

Exelis is adjusting its 2014 financial guidance due to further contraction in Afghanistan programs. Financial guidance includes approximately $15 million of projected restructuring expense and excludes approximately $25 million of expenses related to the planned spin-off of Mission Systems. The company notes that forward-looking statements of future performance made in this release are based upon current expectations and are subject to factors that could cause actual results to differ materially from those suggested here, including those factors set forth in the Safe Harbor Statement below.

Investor Call Today

Exelis senior management will host a conference call for investors today at 10 a.m. Eastern Daylight Time to review second-quarter 2014 results and guidance, and answer questions. The briefing can be monitored live via webcast at the following address on the company's website: http://investors.exelisinc.com.

About Exelis

Exelis is a diversified, top-tier global aerospace, defense, information and services company that leverages a 50-year legacy of deep customer knowledge and technical expertise to deliver affordable, mission-critical solutions for global customers. We are a leader in positioning and navigation, sensors, air traffic management solutions, image processing and distribution, communications and information systems; and focused on strategic growth in the areas of critical networks, ISR and analytics, electronic warfare and composite aerostructures. Headquartered in McLean, Va., Exelis employs about 17,000 people and generated 2013 sales of $4.8 billion. For more information, visit our website at www.exelisinc.com or connect with us on Facebook, Twitter and YouTube.

Safe Harbor Statement

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 (the “Act”): Some of the information included herein includes forward-looking statements intended to qualify for the safe harbor from liability established by the Act. Whenever used, words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target,” “may,” “could,” “outlook” and other terms of similar meaning are intended to identify such forward-looking statements. Forward-looking statements are uncertain and to some extent unpredictable, and involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed in, or implied from, such forward-looking statements. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the company’s historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to:

• The timing and completion of the tax-free spin-off described in this document;
• Our dependence on the defense industry and the business risks peculiar to that industry, including changing priorities or reductions in the U.S. government or international defense budgets;
• Government regulations and compliance therewith, including changes to the Department of Defense procurement process;
• Our international operations, including sales to foreign customers;
• Competition, industry capacity and production rates;
• Misconduct of our employees, subcontractors, agents and business partners;
• The level of returns on postretirement benefit plan assets and potential employee benefit plan contributions and other employment and pension matters;
• Changes in interest rates and other factors that affect earnings and cash flows;
• The mix of our contracts and programs, our performance, and our ability to control costs;
• Governmental investigations;
• Our level of indebtedness and our ability to make payments on or service our indebtedness;
• Subcontractor performance;
• Economic and capital markets conditions;
• The availability and pricing of raw materials and components;
• Ability to retain and recruit qualified personnel;
• Protection of intellectual property rights;
• Changes in technology;
• Contingencies related to actual or alleged environmental contamination, claims and concerns;
• Security breaches and other disruptions to our information technology and operations;
• Our ability to execute our internal performance plans including restructuring, productivity improvements and cost reduction initiatives;
• Unanticipated changes in our tax provisions or exposure to additional income tax liabilities; and
• Ability to execute our internal performance plans, including restructuring, productivity and cost-reduction initiatives.

The forward-looking statements in this release are made as of the date hereof and the company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the company’s historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in the Exelis Inc. Form 10-K for the fiscal year ended December 31, 2013, and those described from time to time in our future reports filed with the Securities and Exchange Commission.

Key Performance Indicators and Non-GAAP Financial Measures

Management reviews key performance indicators including revenue, segment operating income and margins, orders growth, and backlog, among other metrics on a regular basis. In addition, we consider certain additional measures to be useful to management and investors evaluating our operating performance for the periods presented, and provide a tool for evaluating our ongoing operations, liquidity and management of assets. This information can assist investors in assessing our financial performance and measures our ability to generate capital for deployment among competing strategic alternatives and initiatives, including, but not limited to, acquisitions and debt repayment. These metrics, however, are not measures of financial performance under accounting principles generally accepted in the United States of America (GAAP) and should not be considered a substitute for revenue, operating income, income from continuing operations, or net cash from continuing operations as determined in accordance with GAAP. We consider the following non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, to be key performance indicators:

“Adjusted net income” defined as net income, adjusted to exclude items that include, but are not limited to, significant charges or credits that impact current results, but are not related to our ongoing operations, unusual and infrequent non-operating items and non-operating tax settlements or adjustments. A reconciliation of adjusted net income is provided below.

“Segment adjusted operating income” defined as operating income of our two segments, adjusted to exclude items that include, but are not limited to, significant charges or credits that impact current results, but are not related to our ongoing operations, unusual and infrequent non-operating items and non-operating tax settlements or adjustments. A reconciliation of segment operating income is provided below.

“Segment adjusted operating margin” defined as segment adjusted operating income as defined above, divided by revenue. A reconciliation of segment operating margin is provided below.

“Free cash flow” defined as GAAP cash provided by operating activities, less capital expenditures plus separation costs related to the spin-off of Mission Systems. This metric does not include dividend payments.