2013.3.1 -- Exelis Q4 2012 Transcript

7/30/2019 2013.3.1 -- Exelis Q4 2012 Transcript

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Corrected Transcript

1-877-FACTSET www.callstreet.com

Total Pages: 19Copyright 2001-2013 FactSet CallStreet, LLC

01-Mar-2013

Exelis, Inc. (XLS)Q4 2012 Earnings Call


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Corrected Transcript01-Mar-2013


2Copyright 2001-2013 FactSet CallStreet, LLC

CORPORATE PARTICIPANTSCORPORATE PARTICIPANTSCORPORATE PARTICIPANTSCORPORATE PARTICIPANTS

Katy HerrHead-Investor Relations, Exelis, Inc.

David F. MelcherPresident, Chief Executive Officer & Director, Exelis, Inc.

Peter J. MilliganChief Financial Officer & Senior Vice President, Exelis, Inc.

......................................................................................................................................................................................................................................................

OTHER PARTICIPANTSOTHER PARTICIPANTSOTHER PARTICIPANTSOTHER PARTICIPANTS

Robert SpingarnAnalyst, Credit Suisse Securities (USA) LLC (Broker)

Joseph B. NadolAnalyst, JPMorgan Securities LLC

Bill R. LoomisAnalyst, Stifel, Nicolaus & Co., Inc.

Howard A. RubelAnalyst, Jefferies & Co., Inc.

Peter John SkibitskiAnalyst, Drexel Hamilton LLC

......................................................................................................................................................................................................................................................

MANAGEMENT DISCUSSION SECTIONMANAGEMENT DISCUSSION SECTIONMANAGEMENT DISCUSSION SECTIONMANAGEMENT DISCUSSION SECTION

Operator: Welcome to the Exelis Fourth Quarter and Full-Year 2012 Financial Results Conference Call and

Webcast. Hosting the call today from Exelis is Ms. Katy Herr, Head of Investor Relations. Today's call is being

recorded and will be available for replay beginning at 1:00 p.m. Eastern. The dial-in number is 800-585-8367 and

404-537-3406, and enter pin number 85782756. At this time, all participants have been placed in a listen-only

mode and the floor will be opened for your questions following the presentation. [Operator Instructions]

It is now my pleasure to turn the floor over to Ms. Katy Herr. Katy, you may begin.......................................................................................................................................................................................................................................................

Katy HerrHead-Investor Relations, Exelis, Inc.

Thank you, Maria, and good morning, everyone. Thank you for joining us today on our fourth quarter and year-

end 2012 conference call. During today's call, we will reference supplemental material in the form of a

presentation that you may access at www.exelisinc.com/investors.

Let's move to Slide 2. Before we start, please understand that this call contains forward-looking statements that

involve risks and uncertainties that could cause actual results to differ materially from those described in theforward-looking statements. Such statements are made pursuant to the Safe Harbor Provisions of the Private

Securities Litigation Reform Act of 1995, and certain factors that could cause results to differ materially from

those anticipated are set forth on Slide 2 of today's presentation and in this morning's earnings release.

During today's call, we will discuss our financial results for the fourth quarter and full-year 2012. We may refer to

non-GAAP measures, which are defined and reconciled in the appendix of today's presentation and available on

the website.


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Joining me on the call today are Dave Melcher, our President and Chief Executive Officer; and Peter Milligan, our

Chief Financial Officer. As always, we encourage questions at the conclusion of our remarks.

With that said, please turn to Slide 3, and at this time, I'd like to turn the call over to Dave.......................................................................................................................................................................................................................................................


Thank you, Katy. Good morning and thanks for joining us. As most of you know, the end of 2012 marked the

conclusion of our first full-year as an independent public company. Our goal in 2012 was to establish a solid

foundation for the future and we achieved this both operationally and financially. We met or exceeded our

guidance on revenue, adjusted operating margins, adjusted EPS and free cash flow.

In addition, we closed 2012 in a solid financial position. The company generated $385 million in cash from

operating activities, a 15% increase over 2011. Net debt was down 33% compared to 2011 and we have an undrawn

$600 million credit facility. We also worked to reposition the company to support our customers' evolving

strategic priorities, particularly as U.S. military deployments overseas wind down. We have maintained our

competitive focus as we protect our core base of business; aggressively address our re-compete opportunities; and

continue to look for ways to bring our proven technologies, processes and services to new customers.

Some of our 2012 highlights include the following. $363 million has been announced Domestic and International

Airborne Electronic Warfare Awards. We continue to provide innovative ISR technologies to a diverse customer

base. For example, the United States Navy chose Exelis to deliver the Adaptive Persistent Awareness Systems, a

single-award IDIQ with the ceiling of $90 million, to provide an integrated site security solution for critical

infrastructure. The U.S. Army awarded us an IDIQ contract to provide Generation-3 Aviation Night Vision

systems, a contract valued at up to $217 million. And via a separate contract, we are also delivering 3,800 Spiral

Enhanced Night Vision Goggles to this same customer.

We also won positions on large IDIQs, such as the $23.5 billion Enhanced Army Global Logistics SystemEnterprise, or EAGLE program, and the $10 billion Global Tactical Advanced Communication Systems, or GTACS

contract. These contracts give us additional channels to more quickly deliver affordable ready-now

communication solutions and logistics and operations services.

As we mentioned last quarter, we also made strategic investments in the ADS-B infrastructure, our Salt Lake City

aerostructure composites business and our Panama City mine defense business. During 2012, we also bought and

integrated two niche companies that brought additional ISR and multispectral imaging capabilities into our

portfolio. And in January of this year, we closed our acquisition in Australia of a company called C4i, which

expands our global presence in air traffic management.

Let's go to Slide 4. Turning to our fourth quarter performance, we closed the year in line with our expectations.

Notably, we generated $259 million in free cash flow during the fourth quarter, led by strong collections in theI&TS segment. From a segment perspective, the C4ISR segment delivered a solid operating margin of 15.4%,

which represents about 120 basis points of sequential improvement, driven by performance in space systems.

Year-over-year I&TS segment orders were 11.5% higher due to higher ADS-B orders, our NASA Space

Communications and Network Services contracts, or SCNS, and other space ground and range programs.

Turning to Slide 5, we closed the quarter with total backlog of $9.5 billion, down about 19% from the prior year

and down about 10% from the third quarter. While we saw consistent top line performance this year, longer


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Federal acquisition cycles and lower orders on service contract awards, mainly in our mission systems division,

account for most of the decline. About $2.9 billion of backlog is funded, which includes both product deliveries

and funded option years for service contracts. As we anticipated, we have seen some moderation of funded

backlog as production contracts moved to sustainment levels and government customers change their acquisition

mode to smaller order quantities and smaller funding increments on service contracts.

I'd like to take a moment to discuss the pipeline. We're seeing some conservatism in contracting in U.S. Federal

markets, particularly the Department of Defense, as the uncertainty of the fiscal situation continues to weigh on

our customer's ability to make decisions. I'll address the fiscal situation a bit more in a minute. But for now, let me

say that business development remains a top priority. We currently have over $7 billion in proposals in evaluation

for decision during the next 12 months or so. This does not include potential IDIQ awards. We are seeing contract

award delays, longer acquisitions cycles and shorter contract extensions. I continue to push our business

development teams to aggressively add to our pipeline, deepen our customer relationships and bring new

opportunities to the table.

In the middle-right of this slide, we have tried to give you a flavor of some of the key 2013 programs in the pipeline

for new re-compete and follow-on business. We're actively developing our pipeline of future opportunities in our

strategic growth platforms of electronic warfare, ISR and analytics, critical networks, and aerostructures. We arealso laying the groundwork to expand our international and commercial market presence. Today, it is my pleasure

to announce that last week, we received a significant order from an international customer for a space-based

meteorological imager solution. This system will provide the same next-generation capabilities as those currently

being developed by Exelis for the United States and Japan.

These new systems provide a quantum leap in the collection of data for weather forecasting and environmental

monitoring, and the addition of this system to our existing portfolio of domestic and international customers

firmly establishes Exelis as the preeminent global provider of advanced meteorological satellite solutions. You will

see this program move into backlog in quarter one. This is exactly the type of market expansion we have been

discussing for the past year or so. It brings our experience in advanced imagery to an international customer via a

commercial market sale.

It's great to see our team bring home this award, and we see several other similar opportunities in the pipeline,

most notably a potential in 2014 for two similar systems for another international customer. I expect that we will

continue to expand our international and commercial presence modestly over the next few years. In particular, we

see significant international opportunities for our air traffic management solutions, communication systems,

radars and night vision goggles.

You may have noticed that at the end of 2012, we realigned the C4ISR segment a bit to carve out Night Vision and

Tactical Communications Systems as a standalone division within the segment. One of the reasons for this

reorganization was to better focus and leverage business development resources and international distribution

channels for these products. This group currently has about $0.5 billion in proposals and evaluation, the majority

of which are international.

Moving to Slide 6. Working on the front end of our business is only half the equation. We are actively addressing

our cost structure and operational efficiency in order to improve competitiveness and reinvest in the business. As

all of us understand, there continues to be uncertainty for fiscal year 2013 and beyond, and since sequestration

begins today with no apparent imminent action to stop it, we have to acknowledge that. The Office of

Management and Budget and the DOD service chiefs have described some of the impacts and steps to be taken in

response to sequestration.


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Our 2013 guidance anticipates a continuing resolution through March 27 but does not contemplate a protracted

sequestration scenario. That said, we do expect that the U.S. Federal contracting environment will slow over the

coming months and years, and funding will eventually be re-prioritized from in-theater actions to investments

aligned with the administration's strategic objectives.

We mentioned last quarter our plans to continue to right-size the business for the future competitiveenvironment. 2012 results included about $12 million in restructuring expense, most of which was incurred in the

fourth quarter. In our 2013 guidance, we anticipate $60 million to $70 million in restructuring charges with the

majority of the expense incurred in the first half of the year. We expect to consolidate our facility square footage

by about 10% during the year and we are targeting at least that much in the following 12 months to 24 months.

We will manage our employee population to the market requirements. We expect to reduce our total employee

head count by about 6%, including nearly 600 employees who have already accepted a voluntary early retirement.

We will continue to reduce discretionary expenses across the board and we'll focus R&D investment in the key

strategic growth areas of electronic warfare, ISR and analytics, and critical networks. We expect that the benefits

of these actions will mostly offset the expense during the year.

In parallel, we're moving out on a second phase of deeper business restructuring over the next 12 months to 24months that will, as I mentioned, further consolidate our footprint, optimize appropriate spans of control within

our organizations, reduce our corporate and division overhead, and reengineer business processes for greater

efficiency and cost reduction, allowing for appropriate investments in enterprise systems. We will keep you posted

on these next steps as we move through the year.

Let me close with a few examples of the great work our team is doing. Just this week at Mission Systems, we

started a new contract as the service provider at Fort Rucker, Alabama, the home of Army aviation. We are also

looking forward to the Army's NETCOM award of the OMDAC-SWACAA contract in the near future, having

successfully delivered this capability since 2005.

We will also deliver the 393rd domestic airborne electronic warfare system during our multi-decade partnership

with the United States Navy, which includes 192 months of on-time delivery. Importantly, we'll complete theconstruction of the ADS-B network during 2013. By the end of 2012, we had deployed more than 80% of the

required ground stations and achieved acceptance testing of approximately 75% of the required service volumes.

The ADS-B team's performance continues to be outstanding, delivering contracted capability on schedule and

within budget. As a team, we're proud of the solid foundation built in 2012. We understand that the ongoing

budget uncertainty and the reality of sequestration cast a shadow on the whole aerospace and defense segment.

We continue to manage proactively and decisively that which is within our control.

We are actively pursuing a broad spectrum of business opportunities, restructuring the business for greater cost

efficiency and realigning the business for greater agility. And we're focused on delivering outstanding performance

for our customers by offering them innovative technologies and affordable solutions for their current and future

needs.

I'll now turn the call over to Peter to go through some more detail on the 2012 results on Slide 7. Peter?......................................................................................................................................................................................................................................................



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Thanks, Dave, and good morning, everyone. I'll review the 2012 results and then provide an update on pension

performance and outlook, as well as our guidance for 2013. Starting with our full-year 2012 results, as you heard

from Dave, our performance met or exceeded our guidance on all projected metrics. Of note, free cash flow for the

year came in at $285 million and that's after contributing $266 million to our pension. Excluding those

contributions, we converted free cash flow at over 130% of net income.

Revenue came in at $5.5 billion, slightly higher than our high end of our range due to stronger anticipated sales in

the I&TS segment, particularly on Afghanistan and NASA programs. Adjusted operating margin was 10.7%, the

midpoint of our range, and adjusted EPS was $1.85.

Moving to Slide 8, the C4ISR segment performed as expected. Orders were down about 13% year-over-year due to

international radar and communication systems, which tend to be lumpy, and Counter IED Jammer upgrades.

Orders for Airborne Electronic Warfare systems and Spiral Enhanced Night Vision Goggles somewhat offset this

decline. The segment delivered $2.5 billion in revenue, again in line with our expectations. Adjusted operating

income of $366 million reflects lower volumes, somewhat offset by lower pension expense and discretionary cost

management.

Turning to the I&TS segment on Slide 9. Revenue in this segment was up about 0.5% compared to 2012 as a resultof stronger sales in Afghanistan, as well as the Space Communications Network, or SCNS contract for NASA.

While we didn't see the top line decline, as we originally expected, we did see lower orders during the year as

programs like LOGCAP wind down and customers slow their awards in advance of a budget decision. Lower

orders on Middle East programs were somewhat offset by higher orders on ADS-B, SCNS, and several other space

and ground range support contracts. Adjusted operating income was up 33% for the year due to strong

performance on a few fixed-price contracts and lower discretionary spending. For 2013, I would expect margins to

trend towards the 7% range in that segment.

Turning to Slide 10. Our FAS pension expense came in at $32 million but is expected to increase to a range of $90

million to $100 million in 2013. The increase is mainly due to higher amortization from a large asset loss in 2008

and a $20 million increase from reducing the expected long-term return on assets by 50 basis points to 8.5% to

reflect the current asset allocation.

Our current assumption is that 2013 should be the high watermark for FAS pension expense and should hold flat

or trend down as we move into 2014. CAS pension expense was in line with our original expectations and we

expect that expense to remain flat in 2013, so therefore, roughly comparable to our projected FAS expense in

2013.

At the end of 2012, the unfunded liability was about $2 billion. While the return on assets exceeded our

expectations, the benefit was more than offset by the decline in the discount rate, which added over $400 million

to the liability. As I mentioned, we contributed $266 million to our plans in 2012, and for 2013, we anticipate that

contributions will be between $145 million and $160 million due to the reduced minimum funding threshold

resulting from the MAP-21 legislation.

As I mentioned last quarter, during 2012, several steps were taken to manage pension costs and strengthen the

overall health of the plan. In addition to the voluntary lump sum payout for certain deferred vested plan

participants, actions were taken to adjust the asset mix and the trust to reduce future volatility. We will continue

to evaluate the pension for opportunities to improve financial flexibility as we go forward.

Slide 11 shows our guidance for 2013. It does assume that the current six months' continuing resolution does not

assume any significant disruption or shutdown of government operations resulting from the sequestration. As you


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heard from Dave, our guidance does anticipate a more conservative U.S. Federal acquisition process through the

year. At the top line, I think 2013 revenue will be in the range of $5 billion to $5.1 billion with a bit more than half

of that decline coming from the C4ISR segment.

You can see that we're guiding to operating margin and EPS as reported. There are no adjustments to the 2013

numbers for restructuring or pension expense, but we do believe it's important to see the impact of both items.Note that the comparisons on that chart are year-over-year against 2012 where the only adjustment the only

non-GAAP adjustment we had was for spin cost.

And as I mentioned previously, there will be no adjustments for spin cost in 2013. We'd expect the numbers to be

immaterial. As we look at the operating margin in 2013, it should be between 9.4% and 9.8% and EPS between

$1.45 and $1.55. These metrics, as I mentioned, do include the $60 million to $70 million in restructuring charge,

which is about $0.18 year-over-year.

The year-over-year increase in pension expense impacts EPS by about $0.21, or importantly, 125 basis points on

the operating margins. So absent this increase and what is a non-cash expense, operating margin would show a

slight expansion notwithstanding a more than $400 million revenue decline. While excellent program

performance drives much of this margin performance, we've also continuously reduced our cost structure, gettingahead of our markets. And as you can see, we intend to continue this path aggressively in 2013. We project free

cash flow of at least $225 million for the year, and as a reminder, that does include the pension contributions that

I mentioned before.

Looking across the year, I expect revenue to be fairly linear quarter-to-quarter, other than the first quarter, which

I expect to come in at about $1.2 billion with approximately 60% of that coming from the I&TS segment. And

while the first quarter represents about 24% of our overall projected revenue, I expect that only about 10% to 15%

of our projected EPS to be produced in Q1. The reason for this is that the vast majority of the restructuring impact

will be in Q1 I'm sorry, the vast majority will be in the first half, but most of that will be in the first quarter with

three quarters of that overall charge coming during the first quarter with C4ISR bearing the brunt of that. There

will be some lingering pressure in 2Q 2013, but I would expect improving profitability in the second half of the

year as benefits from the first half restructuring become apparent. For the full-year, C4ISR margins should be inthe low-teens and I&TS margin should be around 7%.

And with that, I'll open the floor to questions.


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QUESTION AND ANSWER SECTIONQUESTION AND ANSWER SECTIONQUESTION AND ANSWER SECTIONQUESTION AND ANSWER SECTION

Operator: The floor is now open for questions. [Operator Instructions] Thank you. Our first question comes

from the line of Robert Spingarn of Credit Suisse. Please go ahead.......................................................................................................................................................................................................................................................

Robert SpingarnAnalyst, Credit Suisse Securities (USA) LLC (Broker) QGood morning.......................................................................................................................................................................................................................................................

David F. MelcherPresident, Chief Executive Officer & Director, Exelis, Inc. AMorning, Rob.......................................................................................................................................................................................................................................................


AMorning, Rob.......................................................................................................................................................................................................................................................

Robert SpingarnAnalyst, Credit Suisse Securities (USA) LLC (Broker) QHi, guys. You both talked about the fact that the guidance does contemplate a softening Federal acquisition

climate as the year progresses. But one of the scenarios you pointed out in this morning's 10-K was a full extension

a full-year extension of the CR, which potentially might not be accompanied with new fiscal 2013 action. And we

know that that could create a problem for new starts, et cetera. How might your guidance differ if we actually get

that outcome?......................................................................................................................................................................................................................................................

Peter J. MilliganChief Financial Officer & Senior Vice President, Exelis, Inc. A

Well, so I think about it this way, Rob. We have about 86% or so of our full-year revenue in backlog, which would

include unfunded backlog right now. So for programs like ADS-B and K-BOSSS, which represent some of our

large unfunded programs, that we see obviously continued support on throughout 2013. So from that perspective,

we think that the top line is fairly well-protected. But as Dave will mention or has mentioned, if the environment

gets much worse, and of course, it seems to be evolving minute-by-minute, then there could be some incremental

pressure in what we see on the top line. But this is our best guess of taking into account everything we know, quite

literally through today. And Rob.........................................................................................................................................................................................................................................................

Robert SpingarnAnalyst, Credit Suisse Securities (USA) LLC (Broker)

QYou know.........................................................................................................................................................................................................................................................

Peter J. MilliganChief Financial Officer & Senior Vice President, Exelis, Inc. AGo ahead Rob.......................................................................................................................................................................................................................................................


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Robert SpingarnAnalyst, Credit Suisse Securities (USA) LLC (Broker) QWell, I was just going to say, so you don't have any major new starts that we'd need to worry about under a

continued CR?......................................................................................................................................................................................................................................................

Peter J. MilliganChief Financial Officer & Senior Vice President, Exelis, Inc. AThere's a couple of the new starts that we hope to win, certainly things like Next-Gen Jammer. There are some

other programs with the FAA that could represent new starts. I think the key on that piece though is that you

could see an impact clearly to orders in backlog, that would be I think in line item that we'd see more pressure on,

less so protect we are more so more protected I guess on the top line on revenue because we're pulling it out of

backlog. But certainly if the environment was to get worse, you would see the pressure on backlog.......................................................................................................................................................................................................................................................

Robert SpingarnAnalyst, Credit Suisse Securities (USA) LLC (Broker) QOkay. So that's really a 2014 issue then it sounds like. And then just the other question I have is on the

restructuring, the $60 million to $70 million, how should we think about that from a cash perspective? And whenwould we see that as we flow through the year?......................................................................................................................................................................................................................................................


Yeah, so largely, those restructuring expenses represent employee separation. We should see most of that being

paid out in this year, fairly linear. So that, again, most of that we say it's $60 million to $70 million, probably

$55 million to $60 million of that would be paid during 2013, and again, in a fairly linear way.......................................................................................................................................................................................................................................................

Robert SpingarnAnalyst, Credit Suisse Securities (USA) LLC (Broker) QAnd so your cash flow guidance embeds that cost?......................................................................................................................................................................................................................................................


Absolutely......................................................................................................................................................................................................................................................

Robert SpingarnAnalyst, Credit Suisse Securities (USA) LLC (Broker) QOkay, great. Thank you.......................................................................................................................................................................................................................................................


ASure.......................................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Joe Nadol of JPMorgan.......................................................................................................................................................................................................................................................

Joseph B. NadolAnalyst, JPMorgan Securities LLC Q


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Good morning. Could you guys characterize or do you have a bookings target you could share for the year just

given the pipeline you mentioned and et cetera?......................................................................................................................................................................................................................................................

David F. MelcherPresident, Chief Executive Officer & Director, Exelis, Inc. A

Yeah, this is Dave, Joe. Yeah, we're trying to make sure that we're booking as much as we say we're going to havein sales, if not more. The hesitancy I have is that nobody knows exactly how this year's going to unfold. It's one of

the reasons that I mentioned having $7 billion in potential bookings in the pipeline right now for decision. We'll

see how those things roll out during the year. And one of the as you know with a company that's got a service

business the size that we have, there used to be a day when those contracts were funded fully upfront. And now, it

tends to be month-by-month or maybe two months by two months at the most. So we're cognizant of the

environment. We want to basically hold the line on any backlog erosion and make some inroads into building it.......................................................................................................................................................................................................................................................


And I think, Joe, the other thing is clearly 2012 orders were a little bit disappointing for us, as you could imagine.

And that represented, to a large extent, it represented sort of the notorious slips of things, right? But I guess to be

clear, one of those items that did slip, we had it in the forecast in 4Q, we actually got in early February, Dave

mentioned it. We can't give the specific numbers for competitive and customer reasons, but it is a material a

very material contract for us in the satellite area and that is something that we've closed on already this year. So

while the environment may be weakening, our goal of increasing orders year-over-year I think is reasoned by

having some of those things that have slipped out already booked this year.......................................................................................................................................................................................................................................................

Joseph B. NadolAnalyst, JPMorgan Securities LLC QOkay. And then specifically just on that same point diving into I&TS, a lot of your business there on the mission

side is IDIQs. Is it reasonable to expect in that business with what's happening in Afghanistan, withdrawal, you to

maintain a one-to-one book-to-bill there? Or is that just for the company overall and maybe C4 looks a little better

with the satellite and a recovery there and I&TS is a little weaker?......................................................................................................................................................................................................................................................


Yeah, I think that's exactly right. I mean clearly I think the book-to-bill in mission systems have won this year will

be very, very challenging. I do expect that as you look at the revenue guidance for next year, call it $450 million or

so at the midpoint decline, that certainly will be a piece of that a material piece of that could be well, should be

attributable to the mission systems business. So they'll have some challenges keeping that book-to-bill at one. But

certainly on the C4ISR side, we see some opportunities and you'd see that piece being over 100%, at least in our

targeting.......................................................................................................................................................................................................................................................

Joseph B. NadolAnalyst, JPMorgan Securities LLC QOkay.......................................................................................................................................................................................................................................................


And Joe, this is Dave. Just to add a little color commentary, with sequestration essentially triggering today, the

question comes up a lot about what's the impact of that. Certainly I think initially, the short-cycle O&M businesses


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and particularly those in the Continental United States are more likely to be affected by the Department of

Defense pulling the really the only reasonable lever they can to respond to that. Interestingly though, some of

the overseas O&M associated with feeder needs like our Afghan North and South contract, you know, the K-

BOSSS Base Support contract in Camp Arifjan, TAC-SWACAA for the Communications Networks and the

Preposition Stocks contracts, those are ones that are likely to hold up a lot better. And we do have a lot of those

right now. So whereas it was a it's always a mixed blessing, right? It's [ph] OCO (28:03), funded but it's moredurable here in the near-term.......................................................................................................................................................................................................................................................

Joseph B. NadolAnalyst, JPMorgan Securities LLC QAnd then just one more on this point. The Next-Gen Jammer's I think a pretty big one, if I could characterize it

that way. It's probably an understatement for you this year in C4. Is that is there a make or break is that a

make or break for your number? I'm sure you're factoring it in as a certain percentage into your bookings target.

Or is that just one of many, many drivers?......................................................................................................................................................................................................................................................

Peter J. MilliganChief Financial Officer & Senior Vice President, Exelis, Inc. AIt's one of many drivers and it certainly would not be a make or break for C4ISR this year. It's obviously going to

be more on the backlog side, the conversion into sales, assuming when the program is actually awarded, if it stays

on target and we win. Of course, there's two assumptions there, then you would see some revenue in 2013, not

anything that if it was delayed or for any other reason didn't happen this year, wouldn't be a material move in the

guidance.......................................................................................................................................................................................................................................................

Joseph B. NadolAnalyst, JPMorgan Securities LLC QYeah, I meant more the bookings target not the revenue guidance.......................................................................................................................................................................................................................................................


AIt's definitely more impactful on the bookings. Since we have it factored, we haven't given specific of what wethink that could be, but that would definitely put a little bit more challenge on keeping that at a one-to-one.......................................................................................................................................................................................................................................................

Joseph B. NadolAnalyst, JPMorgan Securities LLC QOkay. And then just one more. Finally, Peter, could you provide your latest update on what percentage of that $2

billion deficit is non-Exelis businesses, the other ITT spins?......................................................................................................................................................................................................................................................


Yeah, it's really no change, Joe. We've said about 60% or so of that unfunded liability would be certainly related to

the defense piece. And as I mentioned earlier, when you think about our I just want to make one another point

on pension, 2013, our FAS expense and our CAS expense will be virtually identical. And as we move forward,

harmonization takes impact, it takes hold, and in 2014 and then more so in 2015, you'll start to see that CAS

expense really outstrip the FAS expense. But for this year, it is completely flat. So from a high-level perspective

and to your specific point, really no major change in that breakdown.......................................................................................................................................................................................................................................................


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Joseph B. NadolAnalyst, JPMorgan Securities LLC QAnd you're managing you've been changing the asset balance like you said, but you've been doing that kind of

across the board in the various different plans, the Exelis and the non-Exelis plans so that going forward, that

proportion we really should think about that remaining pretty steady.

......................................................................................................................................................................................................................................................


Yeah, that's right. I mean there is a comingled trust here, but we do have separate reporting units as we work with

the government on that. The big change in the assets in 2012 were a move towards fixed income. In hindsight, we

made that call at the right time. We made it very early in the year and had a significant return. I think the 10-K

shows that. On our fixed income investment, I think we put a $0.5 billion into that. But as we go forward, we

would expect to see some additional moderation in the aggressiveness, if you will, of that plan, and that's why we

took the expected return from 9% down to 8.5%.......................................................................................................................................................................................................................................................

Joseph B. NadolAnalyst, JPMorgan Securities LLC

QOkay. Thank you.......................................................................................................................................................................................................................................................

David F. MelcherPresident, Chief Executive Officer & Director, Exelis, Inc. ASure. Thanks Joe.......................................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Bill Loomis with Stifel.......................................................................................................................................................................................................................................................

David F. MelcherPresident, Chief Executive Officer & Director, Exelis, Inc. AGood morning, Bill.......................................................................................................................................................................................................................................................

Bill R. LoomisAnalyst, Stifel, Nicolaus & Co., Inc. QGood morning. Can you talk about you mentioned some of your big [indiscernible] (31:07) coming up,

specifically LISC and SWACAA. Can you talk a little bit about those in terms of timing and as you've worked

through the process here, any should we expect if you re-win these, when you re-win them, what any change in

run rate or anything of that sort?......................................................................................................................................................................................................................................................

Peter J. MilliganChief Financial Officer & Senior Vice President, Exelis, Inc. ASure. So some of the re-competes, as we mentioned, on the TAC-SWACAA piece, that should be I think mid-year.

Size of the contract, it probably moderates down a little bit. As far as the NASA, the Deep Space Network, that's a

significant contract that I think is roughly flat and I think that also re-competes sometime in the middle of the

year. The LISC program, as you may know, has been one that has been pushed back for a number of years. So we

could expect that to be in the late spring or early summer. That's obviously a big one for us. I think that's most of

the big opportunities.......................................................................................................................................................................................................................................................


13/19





Bill R. LoomisAnalyst, Stifel, Nicolaus & Co., Inc. QOkay. And then just on some of your other programs, specifically on APS-5 and the Afghanistan program, it

sounds like you expect them to be pretty stable in 2013. How do you see this playing out in 2014?......................................................................................................................................................................................................................................................


Yeah, 2014, it's obviously going to be some dynamics happening this year, depending on how quickly the

withdrawal takes place. Just from a sizing perspective, the two big programs we have in Afghanistan are LOGCAP

with Fluor and the Afghan North and South. Collectively, we probably do little north of $300 million on those

programs. So 2013, as Dave mentioned, we feel pretty good about that. 2014, we'll see as the year develops. But

right now, I think logically we would expect to see that trending down.......................................................................................................................................................................................................................................................

Bill R. LoomisAnalyst, Stifel, Nicolaus & Co., Inc. QAnd the recent commentary of the Army about reducing contractors on or contractor costs on LOGCAP, how

might that impact you? Have you heard anything specific on that?......................................................................................................................................................................................................................................................


Well, we're this is Dave. We're a subcontractor on LOGCAP with Fluor. I think any pressures there would be

transmitted in some fashion to us as well. But I think as a general comment across the O&M world, there's a

general pressure on contract costs and the government is trying to be a good steward of their resources and we're

trying to help them by bringing the best efficiencies we can to our work.......................................................................................................................................................................................................................................................

Bill R. LoomisAnalyst, Stifel, Nicolaus & Co., Inc. QOkay. But no you haven't heard of near-term reductions of volume or any of that sort at this point?......................................................................................................................................................................................................................................................

David F. MelcherPresident, Chief Executive Officer & Director, Exelis, Inc. ANothing sizable for the work we're doing.......................................................................................................................................................................................................................................................

Bill R. LoomisAnalyst, Stifel, Nicolaus & Co., Inc. QOkay. Thank you.......................................................................................................................................................................................................................................................

Operator: Our next question comes from the line of Howard Rubel of Jefferies.......................................................................................................................................................................................................................................................

David F. MelcherPresident, Chief Executive Officer & Director, Exelis, Inc. AMorning, Howard.......................................................................................................................................................................................................................................................

Howard A. RubelAnalyst, Jefferies & Co., Inc. Q


14/19





Good morning. Usually there's an ability to recover some of your costs associated with restructuring. How are you

thinking about that? And how can you recover it?......................................................................................................................................................................................................................................................

Peter J. MilliganChief Financial Officer & Senior Vice President, Exelis, Inc. ASure. On the cost plus side, in many cases, it's recoverable. We'll put it into the rates to the extent we'll negotiatethat with the government and we'll show that restructuring is a net benefit to them. On the fixed-price jobs,

obviously that's a different issue. And as our mix is roughly 55/45, think about that, but also think about most of

the restructuring coming in at C4ISR side. So you have even though more of our business is services where you

would see that recovery, more of our restructuring expense is in the product side where you would see less of it.

But the reality for us, of course, is you think about restructuring and a couple of thoughts that we had as we went

into this year. First of all, Dave mentioned some of the specifics around the areas where the costs will have to be

moderated. And our objective is was and is to have as many of those costs out of the cost basis early in the year

as possible. So as Dave mentioned, we should largely see that restructuring expense offset by the benefits within

the year. And then going forward, you have a couple of choices. I mean for one, you have an improved cost base,

which you, in some cases, you certainly want to use for reinvestment. And the other you use that lower cost base to

have a better competitive position and offer your customer a better value. So that's the calculus we'll be going

through.......................................................................................................................................................................................................................................................

Howard A. RubelAnalyst, Jefferies & Co., Inc. QAnd Peter, actually to follow-up on exactly that point, maybe there's two sort of questions. One is with respect to

whether it's radios or night vision, how do you see this improved competitiveness translate either into expanding

your market share or giving you an opportunity to sell product that would be more compelling than would

otherwise be the case.......................................................................................................................................................................................................................................................


AYeah, I mean if you think about the international market and communications clearly, there's a lot of choices thatare in the market right now. So price is a piece of the puzzle. So clearly, while the market is not let's say as price

competitive as you'd see on the services side, and the economics are very different, having a lower price point

gives you more flexibility. And like I mentioned before on the investment side, having a lower cost structure allows

you to then more aggressively market to areas that maybe you hadn't before. So I think that's part of the process

that we'll go through.......................................................................................................................................................................................................................................................


Yeah, Howard, and this is the Dave. I would just add, more and more, the conversations you have with leadership

in the Department of Defense are about providing affordable solutions and upgrading installed base because theyunderstand and appreciate the fact that they're not going to have as many new programs and they're not going to

have as many dollars in the future to buy new things. And so to the extent we can take advantage of that in where

we have a very large installed base with night vision and communications, and then to extend some of that

internationally, I think that that's something that would be important to us to do.......................................................................................................................................................................................................................................................

Howard A. RubelAnalyst, Jefferies & Co., Inc. Q


15/19





Are there I just have one more on this and then one other question. If you look at where you're going to go in

square footage and probably in head count, how do you sort of measure that versus a world-class standard? And

how close do you think you'll get to that?......................................................................................................................................................................................................................................................

Peter J. Milligan

Chief Financial Officer & Senior Vice President, Exelis, Inc.

AWell, you certainly want to be at that standard, and it's sort of hard to figure out what to measure. We've donebenchmarks. We've looked at it in many different cases. We've had a couple of outside folks help benchmark that.

And although as I mentioned earlier, this restructuring expense is significant, it's not the first one we've had over

the last numbers of years. Last year was a little lower at $12 million, but the year before was over $20 million. So

we've continued to take the costs out, and again, that's why we don't make adjustments for the numbers. We'll

give you the information and then of course folks in your role will treat it the way they think is best. But if I do for

a second look at our 2013 numbers and I take the increase in pension expense out on a FAS basis, which is non-

cash, our margins would actually be expanding. And again, that's expanding into a fairly significant revenue

decline, which means that we've been very efficient on cost. So I certainly won't say that we're world-class, but I

think our attempt of course will be to get there.

Going forward, we'll have more footprint opportunities. We'll have south of 7 million square feet as we exit 2013.

We need at least another 10% of that to be reduced over time. If you think about our business, when we acquired

EDO, it was a series of it was essentially a holding company, and I know you've covered that company for many

years. So we have distributed manufacturing facilities. Over time with the right operational approach, we have to

begin to rationalize that back and that's exactly what we'll do.......................................................................................................................................................................................................................................................

Howard A. RubelAnalyst, Jefferies & Co., Inc. QAnd then last on new products, you didn't really talk much, Dave, about what you could do in the Jammer market

or and while I know that that's highly prescribed with the opportunities, my sense is that roadside bombs are

not going away. And so how do you shape your market opportunity there?......................................................................................................................................................................................................................................................

David F. MelcherPresident, Chief Executive Officer & Director, Exelis, Inc. ANo, it's a great question and I agree with your hypothesis that this is going to be a threat that's going to be there

for a while. So I mean you know we've tried to provide solutions to upgrade existing capabilities that were in the

field, and we were working on the next generation of system, of system capabilities going forward. While I expect,

as we've said before, for that to remain as a developmental effort for a while, we're trying to have a really robust

dialogue, not only with the Navy who has principally been managing that program, but the Army and the Marine

Corps, who are the recipients of the great bulk of the capability. On what is the right way to move that capability

forward in order to continually improve it because the threat will not remain idle; we all know that. So we're

continuing to do things that we can to try and help the customers move this along. And the day will come when

we're going to be buying a lot more of this capability to counter some new threat. We are thinking and are working

to try and make sure that we're there.......................................................................................................................................................................................................................................................

Howard A. RubelAnalyst, Jefferies & Co., Inc. QThank you, gentlemen.......................................................................................................................................................................................................................................................


16/19





David F. MelcherPresident, Chief Executive Officer & Director, Exelis, Inc. AThank you, Howard.......................................................................................................................................................................................................................................................

Operator: [Operator Instructions] Our next question comes from the line of Peter Skibitski of Drexel Hamilton.......................................................................................................................................................................................................................................................

Peter John SkibitskiAnalyst, Drexel Hamilton LLC QHey. Just had some housekeeping questions. First, Peter, could you let us know the tax rate you're assuming for

2013, and as well as R&D?......................................................................................................................................................................................................................................................

Peter J. MilliganChief Financial Officer & Senior Vice President, Exelis, Inc. ASure. R&D in 2012 was $65 million. We expect it to be roughly in line, maybe trending down a little bit in 2013. If

you look at the tax rate, we ended the year on adjusted basis of 36.7%. Our view of that was for 2012. Our view

for 2013 would be sort of in that same range, maybe a little bit lower. Interestingly though, the first quarter ratewill be the lowest as you get a couple of discrete benefits in Q1 and you also have that benefit from I guess the

double impact of the R&D credit. So while I mentioned before, you have a little bit of an anomaly in our numbers

as I look at them across the year, the first quarter is really a couple of things that of note, and of course

restructuring we've talked about in detail, the tax rate is the other one where and I would expect that first

quarter tax rate to be potentially at or slightly below 30%. But for the full-year, Pete, probably around that 36.5%.......................................................................................................................................................................................................................................................

Peter John SkibitskiAnalyst, Drexel Hamilton LLC QOkay, gotcha. And then the new share repurchase plan, should we just assume that's going to offset options creep?......................................................................................................................................................................................................................................................


AThat's right. We have we ended the year with about 188.5 million or so. Our objective would be to have a similarshare count as we exited 2013.......................................................................................................................................................................................................................................................

Peter John SkibitskiAnalyst, Drexel Hamilton LLC QOkay. And then you guys talked about a couple on your slides, there's a couple of mentions of investment. Is

CapEx going to be up next year?......................................................................................................................................................................................................................................................

Peter J. MilliganChief Financial Officer & Senior Vice President, Exelis, Inc. ACapEx in 2013 will be down. Two big reasons for that. We made our capital investment in the Aerostructures

business, as Dave had mentioned. That is now largely behind us. And of course, so that building is facilitized at

this point and we'll be in a great spot to start to win some new awards there. On the other piece, ADS-B capital

moderates down as well. So but the other thing I think about, if you think over overall investment, there was

also sort of the inorganic investment that we made last year. So the two acquisitions which were just a little bit

over $40 million, in some cases, is sort of purchased R&D in one case. So it gives us some opportunities to

leverage that as we move into 2013.


17/19





The other thing of importance and this is a little bit beyond 2013, but so if our capital in 2012 was $120 million,

I expect it to be under $100 million in 2013. And then in 2014, it can potentially go way down because ADS-B is

essentially, as Dave mentioned earlier, finished. It doesn't mean that we will necessarily take the capital to below

$40 million or something, but we certainly have less of a commitment from a free cash flow perspective for that.

So it gives us a nice choice set.......................................................................................................................................................................................................................................................

Peter John SkibitskiAnalyst, Drexel Hamilton LLC QYeah, it seems like strategically in 2014, I mean your balance sheet is going to be meaningfully improved it seems

like and cash flow should be improved. And it seems like maybe you guys are going to have some strategic

decisions to make in terms of ramping up the share repurchase meaningfully or doing a big deal. Or how are you

guys kind of thinking through that whole process? I'm sure you kind of sense that next year.......................................................................................................................................................................................................................................................


Yeah, I'll let Dave talk at the strategic level in a second, but I will say that our view on 2012 or my view certainly,

and what we were able to do on the cash flow side, was just a real strong positive from where I sit. I mean

specifically, the Mission Systems team was able to drive some real significant cash collections towards the end of

the year. That business should operate with a low invested capital, and it does, especially now as we made some

big collections. I had talked throughout 2012 on that topic, and said there was a couple of items that we were

chasing down, that we had no concern that we're going to collect and it was just timing. And it was a significant

effort to get that collected, but we did get the cash collected and it's behind us.

Our working capital is in the low-single digits. So we took some working capital off the balance sheet in 2012.

We're sort of looking at that 3% to 4%, if you exclude cash for a second, on that working capital side. So we feel

like we're running the business pretty effectively there, but there's always some additional opportunities. But then

from a strategic level on uses of cash, I'll turn to Dave.......................................................................................................................................................................................................................................................

David F. MelcherPresident, Chief Executive Officer & Director, Exelis, Inc. APeter's addressed some of the things that we're going to do. I mean strategically, we want to continue this journey

towards becoming the best C4ISR networking company we can possibly be. And those growth platforms that I

mentioned a bit during the brief in electronic warfare, ISR and analytics, critical networks and aerostructures,

really are the place where we're going to focus the bulk of our investment, acquisitive firepower and so forth. But

as you know, we want to continue to pay a good dividend. We're going to do some limited share repurchases. And

we want to make sure that we're attending to the pension, as we've been doing here over the last year or so. So

we're trying to balance the capital allocation in a meaningful way, and as opportunity presents itself, it'll be

focused on those strategic growth platforms.......................................................................................................................................................................................................................................................

Peter John SkibitskiAnalyst, Drexel Hamilton LLC QOkay. Thank you. And then Dave, just a couple things on re-competes. GPS III, I assume that you guys were going

to be on GPS III as a sensor provider for the life of the program. Is this something that you have to kind of re-

compete for each new satellite? Is that why you have that listed?......................................................................................................................................................................................................................................................



18/19





Well, GPS III, right, I mean they come in tranches. There's follow-on work that is available. We compete for it as a

subcontractor to our prime. And it goes over I think the first several four or so, are cost plus contracts, and then it

goes into a fixed-price regime. And there are up to potentially 20 of these things that could be procured over time.

So we're trying to do our best to be competitive, control our costs and provide certainly a great product so that the

government's going to want these things.......................................................................................................................................................................................................................................................

Peter John SkibitskiAnalyst, Drexel Hamilton LLC QOkay. Got it. And then here's my last one, I promise. Under your competitive opportunities, you don't have either

of the radio programs listed, MNVR, SRW appliqu and the Rifleman Radio. Is that because you guys see those

competitions either sliding to the right or maybe aren't meaningful enough for you? Is that why?......................................................................................................................................................................................................................................................

David F. MelcherPresident, Chief Executive Officer & Director, Exelis, Inc. ANo. Look, they're all meaningful. They're all important part of the landscape. We're going to compete for the SRW

appliqu. It has gone a little slower than we thought it would out of the network integration evaluation. We have a

product called GNOMAD which is a Network on the Move capability that's been requested in field, and we're

trying to move that out and be a part of it. We are partnered with another one of our prime partners on the MNVR

radio. And of course, Rifleman's out there, although I think you've probably noticed that most of the radios have

been bought under the program of record rather than competitively. And we wish more would be bought

competitively.

We're also taking some of those similar kinds of capabilities internationally; the SpearNet radio is one that we just

signed a contract for the other day, which takes some of that kind of network, MESH network, self-healing

network capability internationally. So those are all an important part of the landscape for us. We'll see how much

the government is able to put into contracting, but we were very pleased that they've put in place this GTACS

contract vehicle because now it affords an opportunity outside of the program of record to buy these capabilities.......................................................................................................................................................................................................................................................

Peter John SkibitskiAnalyst, Drexel Hamilton LLC QGot it. Okay. Thanks very much, guys.......................................................................................................................................................................................................................................................

David F. MelcherPresident, Chief Executive Officer & Director, Exelis, Inc. AOkay, thank you.......................................................................................................................................................................................................................................................

Peter J. MilliganChief Financial Officer & Senior Vice President, Exelis, Inc. AThanks, Pete.

......................................................................................................................................................................................................................................................

Operator: At this time, there are no further questions. I would now like to turn the floor back over to Mr. Dave

Melcher for any additional or closing remarks.......................................................................................................................................................................................................................................................



19/19



1 877 FACTSET ll

19C i h 2001 2013 F S C llS LLC

Well, I would just close by saying that this is an interesting day for all of us. This is going to be an interesting year.

And we're working very hard to control and influence the things that we can control. And we've talked about a lot

of them. From the capital allocation to the strategy to the reduction of costs in the businesses, and looking for

ways to provide our shareholders a good return going forward. So we're going to stay in close contact with you

through the many conferences and investor interactions that we have over the course of the next year.

And as we've been in our first year as a public company, we'll continue to try and be as transparent as we can and

make sure that you have a good picture of where we're going and what we're trying accomplish. So thanks for your

time and attention today.......................................................................................................................................................................................................................................................

Operator: Thank you. This does conclude today's conference call and webcast. Please disconnect your lines and

close your webcast browser at this time and have a wonderful day.

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Documents

2013.3.1 -- Exelis Q4 2012 Transcript