Form 10-Q Exelis Inc. For: Sep 30
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E-mailUNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,�D.C. 20549
FORM�10-Q
(Mark One)
�����QUARTERLY REPORT PURSUANT TO SECTION�13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September�30, 2014
or
�����TRANSITION REPORT PURSUANT TO SECTION�13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from�������������to������������
Commission File Number:�001-35228
EXELIS INC.
�(Exact name of registrant as specified in its charter)
State of Indiana | � | 45-2083813 |
(State or Other Jurisdiction of Incorporation or Organization) | � | (I.R.S. Employer Identification Number) |
(Address of Principal Executive Offices)
(703)�790-6300
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1)�has filed all reports required to be filed by Section�13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12�months and (2)�has been subject to such filing requirements for the past 90�days.����Yes�������No���
Indicate by check mark whether the registrant has submitted electronically and posted on its web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule�405 of Regulation�S-T during the preceding 12�months (or for such shorter period that the registrant was required to submit and post such files).����Yes�������No���
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large�accelerated�filer�� � | � | Accelerated�filer�� � | �� | Non-accelerated�filer�� � | � | Smaller�reporting�company��� |
(Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule�12b-2 of the Exchange Act).����Yes�������No���
As of October�28, 2014 there were 186,749,096 shares of common stock ($0.01�par value per share) outstanding.
TABLE OF CONTENTS
�
�
Page | 2
PART�I.�FINANCIAL INFORMATION
ITEM�1.�FINANCIAL STATEMENTS
EXELIS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
�
� | Three Months Ended September 30, | Nine Months Ended� �September 30, | |||||||||||||
�� | 2014 | 2013 | 2014 | 2013 | |||||||||||
Product revenue | $ | 503 | $ | 498 | $ | 1,506 | $ | 1,515 | |||||||
Service revenue | 565 | 643 | 1,724 | 2,062 | |||||||||||
Total revenue | 1,068 | 1,141 | 3,230 | 3,577 | |||||||||||
Cost of product revenue | 356 | 354 | 1,088 | 1,091 | |||||||||||
Cost of service revenue | 477 | 537 | 1,456 | 1,708 | |||||||||||
Selling, general and administrative expenses | 117 | 100 | 344 | 337 | |||||||||||
Research and development expenses | 18 | 11 | 43 | 39 | |||||||||||
Restructuring and asset impairment charges | 4 | 6 | 11 | 68 | |||||||||||
Operating income | 96 | 133 | 288 | 334 | |||||||||||
Interest expense, net | 9 | 10 | 27 | 28 | |||||||||||
Other (income) expense, net | (1 | ) | 3 | (5 | ) | 2 | |||||||||
Income from continuing operations before income tax expense | 88 | 120 | 266 | 304 | |||||||||||
Income tax expense | 36 | 40 | 101 | 102 | |||||||||||
Net income | $ | 52 | $ | 80 | $ | 165 | $ | 202 | |||||||
Earnings Per Share | |||||||||||||||
Basic | |||||||||||||||
Net income | $ | 0.28 | $ | 0.42 | $ | 0.87 | $ | 1.07 | |||||||
Diluted | |||||||||||||||
Net income | $ | 0.27 | $ | 0.41 | $ | 0.85 | $ | 1.06 | |||||||
Weighted average common shares�outstanding basic | 188.4 | 188.5 | 189.0 | 188.3 | |||||||||||
Weighted average common shares�outstanding diluted | 193.2 | 192.8 | 193.9 | 191.0 | |||||||||||
Cash dividends declared per common share | $ | 0.10 | $ | 0.10 | $ | 0.31 | $ | 0.31 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
Page | 3
EXELIS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(IN MILLIONS)
�
� | Three Months Ended September 30, | Nine Months Ended� �September 30, | |||||||||||||
�� | 2014 | 2013 | 2014 | 2013 | |||||||||||
Net income | $ | 52 | $ | 80 | $ | 165 | $ | 202 | |||||||
Other comprehensive income (loss), net of tax | |||||||||||||||
Net foreign currency translation adjustments | (9 | ) | 9 | (5 | ) | (3 | ) | ||||||||
Defined benefit plans | |||||||||||||||
Net actuarial gain arising during the period | 116 | ||||||||||||||
Amortization of net actuarial loss included in net periodic benefit cost | 25 | 17 | 52 | 53 | |||||||||||
Amortization of prior service cost included in net periodic benefit cost | 1 | 1 | |||||||||||||
Other comprehensive income (loss), net of tax | 16 | 26 | 48 | 167 | |||||||||||
Total comprehensive income | $ | 68 | $ | 106 | $ | 213 | $ | 369 | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
Page | 4
EXELIS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS)
�
September�30, 2014 | December�31, 2013 | ||||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 524 | $ | 469 | |||
Receivables, net | 939 | 939 | |||||
Inventories, net | 258 | 246 | |||||
Deferred tax asset | 44 | 16 | |||||
Other current assets | 42 | 70 | |||||
Total current assets | 1,807 | 1,740 | |||||
Plant, property and equipment, net | 452 | 498 | |||||
Goodwill | 2,195 | 2,184 | |||||
Other intangible assets, net | 157 | 167 | |||||
Deferred tax asset | 186 | 216 | |||||
Other non-current assets | 120 | 79 | |||||
Total non-current assets | 3,110 | 3,144 | |||||
Total assets | $ | 4,917 | $ | 4,884 | |||
Liabilities and Shareholders Equity | |||||||
Current liabilities | |||||||
Accounts payable | $ | 311 | $ | 367 | |||
Advance payments and billings in excess of costs | 266 | 301 | |||||
Compensation and other employee benefits | 183 | 216 | |||||
Other accrued liabilities | 173 | 160 | |||||
Total current liabilities | 933 | 1,044 | |||||
Defined benefit plans | 1,259 | 1,407 | |||||
Long-term debt | 778 | 649 | |||||
Deferred tax liability | 3 | 2 | |||||
Other non-current liabilities | 155 | 130 | |||||
Total non-current liabilities | 2,195 | 2,188 | |||||
Total liabilities | 3,128 | 3,232 | |||||
Commitments and contingencies (Note 15) | |||||||
Shareholders equity | |||||||
Common stock | 2 | 2 | |||||
Additional paid-in capital | 2,660 | 2,623 | |||||
Treasury stock | (69 | ) | (16 | ) | |||
Retained earnings | 580 | 475 | |||||
Accumulated other comprehensive loss | (1,384 | ) | (1,432 | ) | |||
Total shareholders equity | 1,789 | 1,652 | |||||
Total liabilities and shareholders equity | $ | 4,917 | $ | 4,884 | |||
The accompanying notes are an integral part of the condensed consolidated financial statements.
Page | 5
EXELIS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
�
� | Nine Months Ended September 30, | ||||||
�� | 2014 | 2013 | |||||
Operating activities | |||||||
Net income | $ | 165 | $ | 202 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 88 | 85 | |||||
Stock-based compensation | 21 | 25 | |||||
Restructuring and asset impairment charges | 11 | 68 | |||||
Payments for restructuring | (23 | ) | (42 | ) | |||
Defined benefit plans expense | 48 | 69 | |||||
Defined benefit plans payments | (134 | ) | (136 | ) | |||
Change in assets and liabilities | |||||||
Change in receivables | 1 | (22 | ) | ||||
Change in inventories | (10 | ) | (4 | ) | |||
Change in other assets | 9 | (5 | ) | ||||
Change in accounts payable | (56 | ) | (93 | ) | |||
Change in advance payments and billings in excess of costs | (35 | ) | 13 | ||||
Change in deferred taxes | (14 | ) | 31 | ||||
Change in other liabilities | 2 | (73 | ) | ||||
Other, net | (2 | ) | |||||
Net cash�provided by operating activities | 71 | 118 | |||||
Investing activities | |||||||
Capital expenditures | (37 | ) | (57 | ) | |||
Proceeds from the sale of assets | 4 | 9 | |||||
Acquisitions, net of cash acquired | (22 | ) | (16 | ) | |||
Other, net | (1 | ) | |||||
Net cash�used in investing activities | (56 | ) | (64 | ) | |||
Financing activities | |||||||
Proceeds from the issuance of debt | 140 | ||||||
Payment of debt Issuance costs | (4 | ) | |||||
Dividends paid | (60 | ) | (39 | ) | |||
Common stock repurchased | (53 | ) | (5 | ) | |||
Proceeds from the exercise of stock options | 17 | 11 | |||||
Other, net | 2 | (2 | ) | ||||
Net cash provided by (used in) financing activities | 42 | (35 | ) | ||||
Exchange rate effects on cash and cash equivalents | (2 | ) | (2 | ) | |||
Net change in cash and cash equivalents | 55 | 17 | |||||
Cash and cash equivalents� beginning of year | 469 | 292 | |||||
Cash and cash equivalents� end of period | $ | 524 | $ | 309 | |||
The accompanying notes are an integral part of the condensed consolidated financial statements.
Page | 6
EXELIS INC.
NOTES�TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE�1
BACKGROUND, BASIS OF PRESENTATION AND USE OF ESTIMATES
Background
Exelis Inc. ( Exelis or the Company ) is a diversified aerospace, defense, information and services company that leverages a greater than 50-year legacy of deep customer knowledge and technical expertise to deliver affordable mission-critical solutions in the areas of imaging and analysis, electronic warfare, air traffic solutions, positioning and navigation, communications and information systems, logistics, and technical services to military, government and commercial customers in the United States and globally. We are focused on strategic growth in the areas of: critical networks; intelligence, surveillance, reconnaissance (ISR) and analytics; electronic warfare; and composite aerostructures. The Company's customers include the U.S. Department of Defense (DoD) and its prime contractors, U.S.�Government intelligence agencies, the National Aeronautics and Space Administration (NASA), the Federal Aviation Administration (FAA), allied foreign governments and domestic and foreign commercial customers. As a prime contractor, subcontractor, or preferred supplier, Exelis participates in many high priority defense and civil government programs in the United�States and internationally. Exelis conducts most of its business with the U.S. Government, principally the DoD.
References in these notes to Exelis , we, us, our, the Company and our Company refer to Exelis Inc. and its subsidiaries, unless the context otherwise requires.
Basis of Presentation
The unaudited Condensed Consolidated Financial Statements included in this Form�10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and, in the opinion of management, reflect all adjustments (which include normal recurring adjustments) necessary for a fair presentation of the Company's financial position, results of operations, and cash flows for the periods presented. Certain information and note disclosures normally included in financial statements prepared annually in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such SEC rules. These financial statements should be read in conjunction with the audited Consolidated and Combined Financial Statements included in our Annual Report on Form 10-K for the year ended December�31, 2013. We believe that the disclosures included in this Form 10-Q are adequate to make the information presented not misleading.
Our quarterly financial periods end on the Friday closest to the last day of the calendar quarter, except for the last quarterly period of the fiscal year, which ends on December�31st. For ease of presentation, the quarterly financial statements included herein are described as ending on the last day of the calendar quarter. The results reported in these financial statements are not necessarily indicative of results that may be expected for the entire year.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Estimates are revised as additional information becomes available. Estimates and assumptions are used for, but not limited to, revenue recognition, income taxes, contingency accruals and valuation allowances, fair value measurements, impairment of goodwill and other intangible assets, postretirement obligations and certain contingent liabilities. Actual results could differ from these estimates.
Page | 7
During the performance of long-term sales contracts, estimated final contract prices and costs are reviewed periodically and revisions are made as required and recorded in income in the period in which they are determined. Changes in estimated revenue, cost of revenue and the related effect to operating income are recognized using a cumulative catch-up adjustment which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a contracts percent complete. For the three and nine months ended September�30, 2014, net favorable cumulative catch-up adjustments related to prior periods increased operating income by approximately $6 and $6, respectively, and diluted earnings per share by approximately $0.02 and $0.02, respectively. For the three and nine months ended September�30, 2013, net favorable cumulative catch-up adjustments related to prior periods increased operating income by approximately $16 and $83, respectively, and diluted earnings per share by approximately $0.06 and $0.29, respectively.
NOTE�2
RECENT ACCOUNTING PRONOUNCEMENTS
Pronouncements Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued final guidance on revenue recognition, which provides a single, comprehensive revenue recognition model for all contracts with customers, aimed at improving comparability within industries, across industries, and across capital markets. The new guidance contains principles, including a five step approach, that an entity will apply to determine the measurement and timing of revenue recognition that will require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also requires additional disclosures intended to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and the related cash flows. Adoption of this guidance could affect the measurement and timing of revenue recognition on our contracts. The guidance is effective for the first interim period within annual reporting periods beginning after December 15, 2016, and can be applied retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with the cumulative effect of initial application of the guidance recognized in retained earnings on the date of initial adoption (simplified transition method). Early adoption is not permitted. We are currently evaluating the methods of adoption and the potential impact of this guidance on our financial position, results of operations and cash flows.
The FASB recently issued final guidance aimed at reducing the frequency of disposals reported as discontinued operations by raising the threshold for a disposal to qualify as a discontinued operation, focusing on strategic shifts that have or will have a major effect on an entity's operations and financial results. The guidance expands the disclosures for discontinued operations, but does not change the presentation requirements for discontinued operations in the income statement. The guidance is effective prospectively for annual periods beginning on or after December 15, 2014, with early adoption permitted, and would only apply to disposals completed subsequent to adoption. We will adopt this guidance on January 1, 2015.
Other new pronouncements issued but not effective until after September 30, 2014 are not expected to have a material impact on our financial position, results of operations or cash flows.
NOTE�3
SPIN-OFF OF VECTRUS
On the first day of our fiscal fourth quarter, September 27, 2014, the Company completed the previously announced spin-off of part of its military and government services business ("Vectrus, Inc." or "Vectrus", formerly referred to as Mission Systems) through a pro rata distribution to the Company's shareholders of one share (in whole shares) of Vectrus common stock for every 18 shares (in whole shares) of the Company's common stock held by such shareholders on September 18, 2014 (the "Record Date"), or approximately 10.5 shares of Vectrus common stock. Immediately after the spin-off, the Company did not beneficially own any shares of Vectrus common stock. Additionally, on September 26, 2014, Vectrus incurred debt and made a net cash distribution of $136 to a subsidiary of Exelis in connection with the spin-off. This cash distribution is subject to a working capital adjustment. The spin-off has been structured to qualify as a tax-free transaction to Exelis and its shareholders for U.S. Federal income tax purposes,
Page | 8
except to the extent shareholders receive cash in lieu of fractional shares. Vectrus began trading as an independent, publicly traded company on the New York Stock Exchange on September 29, 2014.
The spin-off was completed pursuant to various agreements between the Company and Vectrus executed on September 25, 2014 that govern the ongoing relationships between the companies after the spin-off and provided mechanisms for an orderly transition, including the transfer of assets and assumption of liabilities at spin-off and the allocation of employee benefits, income taxes, and certain other liabilities and obligations attributable to periods prior to the spin-off. The executed agreements include the Distribution Agreement, Employee Matters Agreement, Tax Matters Agreement, Master Transition Services Agreement and certain agreements relating to intellectual property.
Vectrus is part of the Companys Information and Technical Services segment and included the following major program areas: Infrastructure Asset Management; Logistics and Supply Chain Management; and Information Technology and Network Communication Services. As the spin-off was completed subsequent to the end of the Company's quarterly financial reporting period on the last Friday of the calendar quarter (September 26, 2014), this Form 10-Q includes Vectrus' financial results as part of our continuing operations. Vectrus' financial results prior to the spin-off will be reported as discontinued operations beginning in our Annual Report on Form 10-K for the year ended December 31, 2014.
NOTE�4
EARNINGS PER SHARE
The following table sets forth the reconciliation of basic and diluted weighted average shares outstanding for our earnings per share calculations:
� | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||
�� | 2014 | 2013 | 2014 | 2013 | |||||||
Weighted average common shares outstanding | 188.4 | 188.5 | 189.0 | 188.1 | |||||||
Add: Weighted average restricted stock awards outstanding(a) | 0.2 | ||||||||||
Basic weighted average common shares outstanding | 188.4 | 188.5 | 189.0 | 188.3 | |||||||
Add: Dilutive impact of stock options | 2.7 | 2.2 | 2.8 | 0.9 | |||||||
Add: Dilutive impact of restricted stock units | 2.1 | 2.1 | 2.1 | 1.8 | |||||||
Diluted weighted average common shares outstanding | 193.2 | 192.8 | 193.9 | 191.0 | |||||||
(a) | Restricted stock awards containing rights to non-forfeitable dividends which participate in undistributed earnings with common shareholders are considered participating securities for purposes of computing earnings per share. |
For the three and nine months ended September�30, 2014, we excluded from our diluted share calculation 0.6 and 0.4 shares, respectively, related to stock options and zero and less than 0.1 shares, respectively, related to restricted stock units, and for the three and nine months ended September�30, 2013, we excluded 0.1 and 2.6 shares, respectively, related to stock options and zero and less than 0.1 shares, respectively, related to restricted stock units, as their effect would have been antidilutive.
NOTE�5
SHAREHOLDERS EQUITY
Capital Stock
Authorized capital was comprised of 750 shares of common stock ($0.01 par value per share) and 50 shares of preferred stock (no par value per share) on September�30, 2014 and December�31, 2013. There were 192.5 and 190.4 shares of common stock issued at September�30, 2014 and December�31, 2013, respectively, and 188.5 and 189.4 shares of common stock outstanding at September�30, 2014 and December�31, 2013, respectively. No preferred stock was issued and outstanding at September�30, 2014 and December�31, 2013.
Page | 9
During the nine months ended September�30, 2014, we repurchased a total of 2.9�shares of our common stock under our share repurchase program for $53, and as of September�30, 2014 the Company had remaining authorization of $31 for future share repurchases through December 31, 2015.
Dividends
On August 12, 2014, our Board of Directors declared a cash dividend of $0.10 per share, payable on October�1, 2014 to shareholders of record on August 29, 2014. During the nine months ended September�30, 2014, we declared three quarterly cash dividends totaling $60 or $0.31 per share.
NOTE�6
ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents changes in accumulated other comprehensive loss, net of tax, by component, for the nine months ended September�30, 2014:
Net Foreign Currency Translation Adjustments | Unamortized Defined Benefit Plan Costs | Accumulated Other Comprehensive Loss | ||||||||
Balance at January 1, 2014 | $ | 16 | $ | (1,448 | ) | $ | (1,432 | ) | ||
Other comprehensive income (loss) before reclassifications | (5 | ) | (5 | ) | ||||||
Amounts reclassified from accumulated other comprehensive loss | 53 | (a) | 53 | |||||||
Other comprehensive income (loss), net of tax | (5 | ) | 53 | 48 | ||||||
Balance at September 30, 2014 | $ | 11 | $ | (1,395 | ) | $ | (1,384 | ) | ||
(a) This accumulated other comprehensive loss component primarily relates to the amortization of net actuarial loss. For the three and nine months ended September�30, 2014, the amortization of net actuarial loss was $25 (net of tax of $(2)) and $52 (net of tax of $15), respectively, which are included in the computation of net periodic benefit cost (Note 12).
Unamortized defined benefit plan costs consist primarily of net actuarial loss totaling $1,391 and $1,443, net of tax, as of September�30, 2014 and December�31, 2013, respectively. Net actuarial gains or losses principally arise from gains or losses on plan assets due to variations in the fair market value of the underlying assets and changes in the benefit obligation due to changes in actuarial assumptions.
Unamortized defined benefit plan costs included in accumulated other comprehensive loss in the unaudited Condensed Consolidated Balance Sheets were reduced by taxes of $919 and $934 as of September�30, 2014 and December�31, 2013, respectively. The changes in defined benefit plan costs included in other comprehensive income (loss) in the unaudited Condensed Consolidated Statements of Comprehensive Income were reduced by taxes of $(2) and $15 for the three and nine months ended September�30, 2014, respectively, and $11 and $111 for the three and nine months ended September�30, 2013, respectively.
NOTE�7
INCOME TAXES
Effective Tax Rate
Our quarterly income tax expense is measured using an estimated annual effective income tax rate, adjusted for discrete items within the period. The comparison of effective income tax rates between periods is significantly affected by discrete items recognized during the periods, the level and mix of earnings by tax jurisdiction and permanent differences.
Page | 10
For the three months ended September�30, 2014, the Company recorded an income tax provision of $36 or 40.9% of income from continuing operations before income tax expense as compared to $40 or 33.3% during the same prior year period. For the nine months ended September�30, 2014, the Company recorded an income tax provision of $101 or 38.0% of income from continuing operations before income tax expense as compared to $102 or 33.6% during the same prior year period. The effective income tax rate varies from the federal statutory rate of 35% primarily due to the unfavorable impact of state taxes offset by the favorable impact from the U.S. manufacturing deduction. The effective income tax rate for the three and nine months ended September 30, 2014 included the unfavorable impact of discrete items primarily related to tax credit adjustments. The effective income tax rate for the nine months ended September�30, 2013 also included the favorable impact of a discrete item related to the renewal of the 2012 federal research and development tax credit.
Uncertain Tax Positions
As of September�30, 2014 and December�31, 2013, unrecognized tax benefits were $40 and $0, respectively. Unrecognized tax benefits are primarily related to the timing of certain income and deductions and could partially impact income tax expense when settled. We anticipate that these unrecognized tax benefits will not significantly decrease within the next twelve months.
NOTE�8
RECEIVABLES, NET
Receivables, net were comprised of the following:
September�30, 2014 | December�31, 2013 | ||||||
Billed receivables | $ | 388 | $ | 395 | |||
Unbilled contract receivables | 545 | 537 | |||||
Other | 9 | 11 | |||||
Receivables, gross | 942 | 943 | |||||
Allowance for doubtful accounts | (3 | ) | (4 | ) | |||
Receivables, net | $ | 939 | $ | 939 | |||
Total billed receivables due from the U.S. Government, either directly or as a subcontractor with the U.S. Government, were $287 and $314 at September�30, 2014 and December�31, 2013, respectively. Because the Companys billed receivables are primarily with the U.S. Government, the Company does not have a material credit risk exposure.
Unbilled contract receivables represent revenue recognized on long-term sales contracts in excess of amounts billed as of the balance sheet date. We expect to bill and collect substantially all of the September�30, 2014 unbilled contract receivables during the next twelve months as scheduled performance milestones are completed or units are delivered.
NOTE�9
INVENTORIES, NET
Inventories, net were comprised of the following:
September�30, 2014 | December�31, 2013 | ||||||
Production costs of contracts in process | $ | 222 | $ | 217 | |||
���Less progress payments | (24 | ) | (27 | ) | |||
Production costs of contracts in process, net | 198 | 190 | |||||
Product inventory | 60 | 56 | |||||
Inventories, net | $ | 258 | $ | 246 | |||
Page | 11
NOTE�10
GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
As of September�30, 2014 and December�31, 2013, goodwill was $2,195 and $2,184, respectively. As of September�30, 2014 and December�31, 2013, goodwill for our C4ISR Electronics and Systems segment was $1,808 and $1,800, respectively, and goodwill for our Information and Technical Services segment was $387 and $384, respectively.
During the third quarter of 2014, the Company acquired Barco Orthogon GmbH for an aggregate purchase price of approximately $18, net of cash acquired, resulting in an increase in goodwill of $8 and other intangible assets of $6. The operating results of the business are reported in the Information and Technical Services segment from the date of acquisition. The assets, liabilities and results of operations for the acquired business were not material to the Company.
Other Intangible Assets, Net
Information regarding our other intangible assets was as follows:
� | September�30, 2014 | December�31, 2013 | |||||||||||||||||||||
�� | Gross Carrying Amount | Accumulated Amortization | Net Intangibles | Gross Carrying Amount | Accumulated Amortization | Net Intangibles | |||||||||||||||||
Customer and distributor relationships | $ | 526 | $ | (388 | ) | $ | 138 | $ | 525 | $ | (371 | ) | $ | 154 | |||||||||
Proprietary technology | 36 | (22 | ) | 14 | 30 | (22 | ) | 8 | |||||||||||||||
Trademarks, patents and other | 10 | (5 | ) | 5 | 9 | (4 | ) | 5 | |||||||||||||||
Total other intangible assets | $ | 572 | $ | (415 | ) | $ | 157 | $ | 564 | $ | (397 | ) | $ | 167 | |||||||||
Amortization expense related to other intangible assets for the three and nine months ended September�30, 2014 was $6 and $18, respectively, and $7 and $20 for the three and nine months ended September�30, 2013, respectively.
Estimated amortization expense for the remaining three months of 2014 and each of the five succeeding years and thereafter is as follows:
Remaining 2014 | $ | 6 | |
2015 | 22 | ||
2016 | 20 | ||
2017 | 18 | ||
2018 | 15 | ||
2019 and thereafter | 76 | ||
Total | $ | 157 | |
NOTE�11
DEBT
Debt consisted of the following:
September�30, 2014 | December�31, 2013 | ||||||
Current portion of Vectrus term loan | $ | 11 | $ | ||||
��Total short-term debt | 11 | ||||||
Long-term debt | 779 | 650 | |||||
Unamortized debt discounts | (1 | ) | (1 | ) | |||
��Total long-term debt | 778 | 649 | |||||
Total debt | $ | 789 | $ | 649 | |||
Page | 12
�
The following table provides a summary of interest rates, carrying values and estimated fair values of outstanding long-term debt:
� | � | September�30, 2014 | December�31, 2013 | |||||||||||||||
�� | Interest�rate | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Long-term debt | ||||||||||||||||||
Senior notes due 2016 | 4.25 | % | $ | 250 | $ | 263 | $ | 250 | $ | 263 | ||||||||
Senior notes due 2021 | 5.55 | % | 400 | 425 | 400 | 404 | ||||||||||||
Vectrus term loan | 2.99 | % | 140 | 140 | ||||||||||||||
Total | � | $ | 790 | $ | 828 | $ | 650 | $ | 667 | |||||||||
The fair value of our notes was determined using prices in secondary markets for identical and similar securities (Level�2 inputs) obtained from external pricing sources. The fair value of the Vectrus term loan approximates the carrying value due to the Vectrus term loan's floating interest rate and due to the short duration between the execution of the Vectrus term loan agreement and the balance sheet date.
Commercial Paper
The Company's commercial paper program is fully supported by available borrowing capacity under our Credit Facility. As of September�30, 2014 and December�31, 2013, there was no commercial paper outstanding under our commercial paper program.
Credit Facility
The Company has a competitive advance and revolving credit facility agreement ( Credit Facility ) with a consortium of lenders, which is available for working capital, capital expenditures and other general corporate purposes. The Credit Facility provides for a four year maturity, expiring October�25, 2015, with a one year extension option upon satisfaction of certain conditions, and comprises an aggregate principal amount of up to $600 of revolving loans, competitive advances and letters of credit with a face amount up to $100. Borrowings under the Credit Facility bear interest at rates based, at our option, on a Eurodollar rate or an alternate base rate, as defined in the Credit Facility. As of September�30, 2014 and December�31, 2013, there were no borrowings or letters of credit outstanding under the Credit Facility.
The Credit Facility contains customary affirmative and negative covenants that, among other things, limit or restrict our ability to: incur additional debt or issue guarantees of indebtedness; create liens; enter into certain sale and lease-back transactions; merge or consolidate with another person; sell, transfer, lease or otherwise dispose of assets; liquidate or dissolve; and enter into restrictive covenants. Additionally, the Credit Facility requires us not to permit the ratio of combined total indebtedness to combined EBITDA (leverage ratio) to exceed 3.50 to 1.00 at any time.
Senior Notes
The Company has outstanding long-term debt consisting of $250 aggregate principal amount of 4.25%�senior notes due October�1, 2016 and $400 aggregate principal amount of 5.55%�senior notes due October�1, 2021 (together the Notes ). As of September�30, 2014 and December�31, 2013, accrued interest payable on the Notes, included in other accrued liabilities, was $16 and $8, respectively, and is payable on April�1 and October�1 of each year.
The Notes have covenants that restrict our ability to, subject to exceptions, incur indebtedness secured by liens or engage in sale and leaseback transactions. The Notes also have customary events of default, including, but not limited to, non-payment of principal and interest, and certain events of bankruptcy, insolvency or reorganization of the Company. Under the terms of the Notes, we have the option to redeem the Notes prior to maturity, and we will be required to make an offer to purchase the Notes if a change of control triggering event (as defined in the Notes indenture) occurs.
Page | 13
Vectrus Debt
In connection with the spin-off of Vectrus, on September 17, 2014, Vectrus, a wholly-owned subsidiary of the Company, entered into a Credit Agreement with a consortium of lenders, including JP Morgan Chase Bank, N.A. as administrative agent. The Credit Agreement includes a five-year senior secured revolving credit facility ("Revolving Facility") and five-year senior secured term loan ("Term Loan"). The Revolving Facility is available for Vectrus' working capital, capital expenditures and other general corporate purposes. Vectrus used the net proceeds from the Term Loan to pay a net cash distribution to a subsidiary of Exelis on September 26, 2014. The Revolving Facility and Term Loan will remain with Vectrus subsequent to the spin-off.
The Revolving Facility is comprised of an aggregate principal amount of up to $75 of revolving loans, up to $35 of which can be used for the issuance of letters of credit, and expires on September 17, 2019. As of September�30, 2014, there were no borrowings or letters of credit outstanding under the Revolving Facility.
The Term Loan consists of an aggregate principal amount of $140 of debt borrowed on September 26, 2014 and is repayable in quarterly installments, with the first installment due December 31, 2014. The quarterly Term Loan repayments are 1.88% of the aggregate principal amount per quarter during year one, 2.50% during each of years two and three, 3.75% during year four, and 14.38% during year five, with the final quarterly installment due September 17, 2019. Voluntary prepayments of principal are allowed without penalty and annual mandatory prepayments are required if there is excess cash flow, as defined in the Credit Agreement.
Borrowings under the Revolving Facility and Term Loan bear interest at rates, at Vectrus' option, based on an alternate base rate or an adjusted LIBO rate, plus an applicable rate dependent on the total leverage ratio of Vectrus, as defined in the Credit Agreement. Interest is payable, at a minimum, quarterly. All borrowings under the Credit Agreement are secured by a first-priority lien on substantially all tangible and intangible assets of Vectrus.
The Credit Agreement contains affirmative and negative covenants that, among other things, restrict Vectrus' ability to, subject to exceptions, create liens and encumbrances; incur additional indebtedness; merge, dissolve, liquidate or consolidate; make acquisitions, investments, advances or loans; dispose of or transfer assets; pay dividends or make other payments in respect of capital stock; amend certain material governance or debt documents; redeem or repurchase capital stock or prepay, redeem or repurchase certain debt; engage in certain transactions with affiliates; enter into certain speculative hedging arrangements; and enter into certain restrictive agreements. The Credit Agreement also requires Vectrus to maintain a ratio of consolidated EBITDA to consolidated interest expense, net of cash interest income, of greater than or equal to 4.50 to 1.00 and a ratio of consolidated indebtedness to consolidated EBITDA (leverage ratio) of less than or equal to 3.50 to 1.00 from December 31, 2014 through June 30, 2015; 3.00 to 1.00 from July 1, 2015 through December 31, 2015; and 2.75 to 1.00 from January 1, 2016 and thereafter.
The Credit Agreement contains customary events of default, including, but not limited to, nonpayment of principal and interest; violation of covenants; failure to pay certain judgments; certain events of bankruptcy and insolvency; certain materially adverse ERISA events; and a change in control. If an event of default occurs, remedies include, but are not limited to, the right of lenders to request immediate payment of all or part of the outstanding principal and interest and termination of future commitments to extend credit under the Revolving Facility.
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NOTE�12
POSTRETIREMENT BENEFIT PLANS
The following tables provide the components of net periodic benefit cost for our defined benefit plans, including defined benefit pension plans and other postretirement defined benefit plans:
� | Three Months Ended September 30, | ||||||||||||||||||||||
� | 2014 | 2013 | |||||||||||||||||||||
�� | Pension | Other Benefits | Total | Pension | Other Benefits | Total | |||||||||||||||||
Net periodic benefit cost | |||||||||||||||||||||||
Service cost | $ | 15 | $ | $ | 15 | $ | 16 | $ | $ | 16 | |||||||||||||
Interest cost | 62 | 5 | 67 | 60 | 5 | 65 | |||||||||||||||||
Expected return on plan assets | (86 | ) | (5 | ) | (91 | ) | (83 | ) | (5 | ) | (88 | ) | |||||||||||
Amortization of net actuarial loss | 22 | 1 | 23 | 25 | 3 | 28 | |||||||||||||||||
Amortization of prior service cost | |||||||||||||||||||||||
Total net periodic benefit cost | $ | 13 | $ | 1 | $ | 14 | $ | 18 | $ | 3 | $ | 21 | |||||||||||
� | Nine Months Ended September 30, | ||||||||||||||||||||||
� | 2014 | 2013 | |||||||||||||||||||||
�� | Pension | Other Benefits | Total | Pension | Other Benefits | Total | |||||||||||||||||
Net periodic benefit cost | |||||||||||||||||||||||
Service cost | $ | 47 | $ | 1 | $ | 48 | $ | 54 | $ | 1 | $ | 55 | |||||||||||
Interest cost | 188 | 15 | 203 | 180 | 14 | 194 | |||||||||||||||||
Expected return on plan assets | (256 | ) | (16 | ) | (272 | ) | (254 | ) | (16 | ) | (270 | ) | |||||||||||
Amortization of net actuarial loss | 64 | 3 | 67 | 79 | 9 | 88 | |||||||||||||||||
Amortization of prior service cost | 1 | 1 | 2 | 2 | |||||||||||||||||||
Net periodic benefit cost | 44 | 3 | 47 | 61 | 8 | 69 | |||||||||||||||||
Effect of curtailments | 1 | 1 | |||||||||||||||||||||
Total net periodic benefit cost | $ | 45 | $ | 3 | $ | 48 | $ | 61 | $ | 8 | $ | 69 | |||||||||||
We contributed $123 and $114 to our qualified defined benefit pension plans during the nine months ended September�30, 2014 and 2013, respectively. We currently anticipate making additional contributions to our qualified defined benefit pension plans in the range of $10 to $20 during the remainder of 2014.
NOTE�13
STOCK-BASED COMPENSATION
The Company maintains an equity incentive plan to govern awards granted to Exelis employees and directors, including awards of non-qualified stock options (NQOs), restricted stock units (RSUs), total shareholder return (TSR) awards, and other awards.
The following table provides the impact of stock-based compensation in our unaudited Condensed Consolidated Statements of Operations:
� | Three Months Ended September 30, | Nine Months Ended September 30, 2014 | |||||||||||||
�� | 2014 | 2013 | 2014 | 2013 | |||||||||||
Compensation cost for equity-based awards | $ | 5 | $ | 7 | $ | 18 | $ | 20 | |||||||
Compensation cost for liability-based awards | 2 | 2 | 3 | 5 | |||||||||||
Total compensation costs, pre-tax | $ | 7 | $ | 9 | $ | 21 | $ | 25 | |||||||
Future tax benefit | $ | 3 | $ | 3 | $ | 8 | $ | 8 | |||||||
Page | 15
At September�30, 2014, total unrecognized compensation costs related to equity-based awards and liability-based awards were $15 and $3, respectively, which are expected to be recognized ratably over a weighted-average period of 2.0 years and 1.9 years, respectively.
The following table provides a summary of the activities for NQOs and RSUs for the nine months ended September�30, 2014:
� | Stock Options | Restricted Stock Units | |||||||||||
�� | Shares | Weighted-� Average Exercise Price Per Share | Shares | Weighted-� Average�Grant Date Fair Value Per Share | |||||||||
Outstanding at January�1, 2014 | 11.46 | $ | 11.13 | 3.48 | $ | 11.48 | |||||||
Granted | 0.57 | 20.82 | 0.72 | 20.52 | |||||||||
Exercised | (1.51 | ) | 10.85 | ||||||||||
Vested | (0.81 | ) | 12.64 | ||||||||||
Forfeited, canceled or expired | (0.08 | ) | 10.95 | (0.06 | ) | 12.16 | |||||||
Outstanding at September�30, 2014 | 10.44 | $ | 11.70 | 3.33 | $ | 13.15 | |||||||
During the nine months ended September�30, 2014, we granted long-term incentive awards to employees consisting of 0.6 NQOs and 0.7 RSUs with respective weighted average grant date fair values per share of $5.12 and $20.52. The NQOs vest annually in three equal installments and have a ten-year expiration period. The RSUs vest annually in three equal installments. We also granted TSR awards with an aggregate target value of $5 that are cash settled at the end of a three-year performance period. The fair value of the NQOs was estimated on the date of grant using the Black-Scholes model. The fair value of the RSUs was determined based on the closing price of Exelis common stock on the date of grant. The fair value of the TSR awards were measured based on the Companys performance relative to the performance of the S&P 1500 Aerospace and Defense index. Depending on the Companys performance during the three-year performance period, payment can range from 0% to 200% of the target value.
The following table details the weighted average assumptions utilized in determining the fair value of the NQOs granted during the first nine months of 2014.
Dividend yield | 1.98 | % | |
Expected volatility | 26.8 | % | |
Expected life (in years) | 7.0 | ||
Risk-free rates | 2.20 | % | |
Weighted-average grant date fair value per share | $ | 5.12 | |
NOTE�14
RELATED PARTY TRANSACTIONS
Separation Agreements
On October�31, 2011, ITT Corporation ("ITT") completed the spin-off (the ITT Spin-off ) of Exelis and Exelis began operating as a stand-alone publicly traded corporation. Prior to the ITT Spin-off, Exelis operated as the Defense and Information Solutions Segment of ITT.
In order to govern certain ongoing relationships between Exelis and ITT following the ITT Spin-off and to provide mechanisms for an orderly transition, on October�25, 2011, Exelis, ITT, and Xylem Inc. executed the various agreements that govern the ongoing relationships between and among the three companies after the ITT Spin-off and provided for the allocation of employee benefits, income taxes, and certain other liabilities and obligations attributable to periods prior to the ITT Spin-off. The executed agreements include the Distribution Agreement, Benefits and Compensation Matters Agreement, Tax Matters Agreement, several real estate matters agreements, and Master Transition Services Agreement. Certain intercompany work orders and/or informal intercompany commercial arrangements were converted into third-party contracts based on ITTs standard terms and conditions.
Page | 16
The Distribution Agreement provides for certain indemnifications and cross-indemnifications among Exelis, ITT and Xylem Inc. The indemnifications address a variety of subjects, including indemnification by ITT of Exelis in respect of certain asserted and unasserted asbestos or silica liability claims.
Services provided to and received from ITT and Xylem Inc. under the separation agreements were generally provided at cost and were substantially completed by the end of 2013. At September�30, 2014 and December�31, 2013, total payables due from Exelis to ITT and Xylem Inc. were $9 and $9, respectively, and total receivables due to Exelis from ITT and Xylem Inc. were $7 and $7, respectively.
NOTE�15
COMMITMENTS AND CONTINGENCIES
General
From time to time, we are involved in legal proceedings that are incidental to the operation of our businesses. Some of these proceedings seek remedies relating to environmental matters, personal injury claims, employment and pension matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures.
Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claim, we do not expect that any asserted or unasserted legal claims or proceedings, individually or in the aggregate, will have a material adverse effect on our cash flow, results of operations, or financial condition.
Environmental
In the ordinary course of business, we are subject to federal, state, local, and foreign environmental laws and regulations. We are responsible, or are alleged to be responsible, for ongoing environmental investigation and remediation of multiple sites. These sites are in various stages of investigation and/or remediation and in many of these proceedings our liability is considered de minimis. We have received notification from the U.S. Environmental Protection Agency (EPA), and from other governmental agencies, that a number of sites formerly or currently owned and/or operated by Exelis, and other properties or water supplies that may be or have been impacted from those operations, contain disposed or recycled materials or wastes and require environmental investigation and/or remediation. These sites include instances where we have been identified as a potentially responsible party under federal and state environmental laws and regulations.
Accruals for environmental matters are recorded on a site by site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies available to us. Our accrued liabilities for these environmental matters represent our best estimates related to the investigation and remediation of environmental media such as water, soil, soil vapor, air and structures, as well as related legal fees. These estimates, and related accruals, are reviewed quarterly and updated for progress of investigation and remediation efforts and changes in facts and legal circumstances. Liabilities for these environmental expenditures are recorded on an undiscounted basis.
It is difficult to estimate the final costs of investigation and remediation due to various factors, including incomplete information regarding particular sites and other potentially responsible parties, uncertainty regarding the extent of investigation or remediation and our share, if any, of liability for such conditions, the selection of alternative remedial approaches, and changes in environmental standards and regulatory requirements. We have estimated and accrued $26 and $26 as of September�30, 2014 and December�31, 2013, respectively, for environmental matters. We believe the total amount accrued is appropriate based on existing facts and circumstances.
Page | 17
The following table illustrates the range of estimated loss and number of active sites for these environmental matters:�
September�30, 2014 (a) | December�31, 2013 | ||||||
Low-end range | $ | 23 | $ | 23 | |||
High-end range | $ | 69 | $ | 44 | |||
Number of active environmental investigations and remediation sites | 46 | 24 | |||||
(a) | In June 2014, the Company received notice from the Department of Justice, Environment and Natural Resources Division, that it may be potentially responsible for contribution to the environmental investigation and remediation of multiple locations in Alaska. Pending further information, we have increased the number of active sites and the high-end range of estimated loss based on our historical costs for similar matters. |
On April 11, 2014, the EPA issued a proposed plan for remedial alternatives to address the cleanup of the lower eight mile stretch of the Passaic River. The EPA estimates the cost for the alternatives will range from $0.4 billion to $3.2 billion. The EPAs preferred alternative would involve dredging the river bank to bank and installing an engineered cap at an estimated cost of $1.7 billion. The EPA is currently evaluating all the input from a public comment period that ended in August 2014 before it makes its final record of decision, which is expected in 2015. Therefore, the ultimate remedial approach and associated costs and the parties who will participate in funding the remediation and their respective allocations have not been determined. The Company has found no evidence that it contributed any of the primary contaminants of concern to the Passaic River. We will vigorously defend our self in this matter and we believe our ultimate costs will not be material.
U.S. Government Contracts, Investigations and Claims
The Company has U.S.�Government contracts that are funded incrementally on a year-to-year basis. Changes in government policies, priorities or funding levels through agency or program budget reductions by the U.S.�Congress or executive agencies could have a material adverse effect on the Companys cash flow, financial condition or results of operations. Furthermore, contracts with the U.S.�Government may be terminated or suspended by the U.S.�Government at any time, with or without cause. Such contract suspensions or terminations could result in un-reimbursable expenses or charges or otherwise adversely affect the Companys cash flow, financial condition or results of operations.
Departments and agencies of the U.S.�Government have the authority to investigate various transactions and operations of the Company, and the results of such investigations may lead to administrative, civil or criminal proceedings, the ultimate outcome of which could be fines, penalties, repayments or compensatory or treble damages. U.S.�Government regulations provide that certain findings against a contractor may lead to suspension or debarment from future U.S.�Government contracts or the loss of export privileges for a company or an operating division or subdivision. Suspension or debarment could have a material adverse effect on the Company because of its reliance on U.S. Government contracts.
U.S.�Government agencies, including the Defense Contract Audit Agency (DCAA) and others, routinely audit and review a contractors performance on government contracts, indirect rates and pricing practices, and compliance with applicable contracting and procurement laws, regulations and standards. Accordingly, costs billed or billable to the U.S.�Government customers are subject to potential adjustment upon audit by such agencies. They also review the adequacy of the contractors compliance with government standards for its accounting and management internal control systems, including: control environment and accounting systems, general information technology systems, budget and planning systems, purchasing systems, material management systems, compensation systems, labor systems, indirect and other direct costs systems, billing systems and estimating systems. Audits currently underway include the Companys control environment and accounting, billing, and indirect and other direct cost systems, as well as reviews of the Companys compliance with certain U.S.�Government Cost Accounting Standards.
Page | 18
From time to time, U.S. Government customers advise the Company of claims and penalties concerning certain potential disallowed costs. When such findings are presented, Exelis and the U.S.�Government representatives engage in discussions to enable Exelis to evaluate the merits of these claims as well as to assess the amounts being claimed. Where appropriate, provisions are made to reflect the expected exposure to the matters raised by the U.S.�Government representatives and such provisions are reviewed on a quarterly basis for sufficiency based on the most recent information available.
Indemnifications
As part of the ITT Spin-off, Exelis, ITT and Xylem Inc. indemnify one another with respect to such parties assumed or retained liabilities under the Distribution Agreement and breaches of the Distribution Agreement or related ITT Spin-off agreements. Exelis expects ITT and Xylem Inc. to fully perform under the terms of the Distribution Agreement and therefore we have not recorded a liability for matters for which we are indemnified. In addition, we are not aware of any claims or other circumstances that would give rise to material payments to ITT or Xylem Inc. under the indemnity that we provide to them.
Letters of Credit
In the ordinary course of business, we use standby letters of credit, guarantees issued by commercial banks and surety bonds issued by insurance companies, as well as self-guarantees, principally to guarantee our performance on certain contracts and to support our self-insured workers compensation plans. At September�30, 2014, there was an aggregate of approximately $91 in surety bonds, guarantees and stand-by letters of credit outstanding.
Rabbi Trust
The Company maintains a grantor trust ( Rabbi Trust ) for the purpose of assisting the Company with the payment of certain nonqualified deferred compensation obligations in the event of a change in control of the Company. The Company is obligated to contribute an amount equal to 110 percent of the Companys obligations under eight nonqualified deferred compensation plans at the time of an Acceleration Event, as defined in such plans and the Rabbi Trust.
NOTE�16
SEGMENT INFORMATION
The Companys segments are reported on the same basis used internally for evaluating performance and for allocating resources. We operate in two segments: Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) Electronics and Systems, and Information and Technical Services. Assets of the business segments exclude general corporate assets, which principally consist of cash, deferred tax assets, certain plant, property, and equipment, and certain other assets.
C4ISR Electronics and Systems
This segment provides engineered systems and solutions, including: ISR systems; integrated electronic warfare systems; radar and sonar systems; electronic attack and release systems; communications solutions; space systems; and composite aerostructures, for government and commercial customers around the world.
Information and Technical Services
This segment provides a broad range of service solutions, including: systems integration; network design and development; air traffic management; cyber; intelligence; operations; sustainment; advanced engineering; logistics; and space launch and range-support, for a wide variety of U.S. military and U.S. Government customers.
Page | 19
Segment financial results were as follows:
� | Three Months Ended September 30, | ||||||||||||||||||||||
� | 2014 | 2013 | |||||||||||||||||||||
�� | Product Revenue | Service Revenue | Total Revenue | Product Revenue | Service Revenue | Total Revenue | |||||||||||||||||
C4ISR Electronics and Systems | $ | 503 | $ | $ | 503 | $ | 498 | $ | $ | 498 | |||||||||||||
Information and Technical Services | 565 | 565 | 643 | 643 | |||||||||||||||||||
Total | $ | 503 | $ | 565 | $ | 1,068 | $ | 498 | $ | 643 | $ | 1,141 | |||||||||||
� | Nine Months Ended September 30, | ||||||||||||||||||||||
� | 2014 | 2013 | |||||||||||||||||||||
�� | Product Revenue | Service Revenue | Total Revenue | Product Revenue | Service Revenue | Total Revenue | |||||||||||||||||
C4ISR Electronics and Systems | $ | 1,506 | $ | $ | 1,506 | $ | 1,515 | $ | $ | 1,515 | |||||||||||||
Information and Technical Services | 1,724 | 1,724 | 2,062 | 2,062 | |||||||||||||||||||
Total | $ | 1,506 | $ | 1,724 | $ | 3,230 | $ | 1,515 | $ | 2,062 | $ | 3,577 | |||||||||||
� | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
�� | 2014 | 2013 | 2014 | 2013 | |||||||||||
Operating Income | |||||||||||||||
C4ISR Electronics and Systems | $ | 59 | $ | 69 | $ | 162 | $ | 128 | |||||||
Information and Technical Services | 37 | 64 | 126 | 206 | |||||||||||
Total Operating Income | $ | 96 | $ | 133 | $ | 288 | $ | 334 | |||||||
Operating Margin | |||||||||||||||
C4ISR Electronics and Systems | 11.7 | % | 13.9 | % | 10.8 | % | 8.4 | % | |||||||
Information and Technical Services | 6.5 | % | 10.0 | % | 7.3 | % | 10.0 | % | |||||||
Total Operating Margin | 9.0 | % | 11.7 | % | 8.9 | % | 9.3 | % | |||||||
September�30, 2014 | December�31, 2013 | ||||||
Assets | |||||||
C4ISR Electronics and Systems | $ | 3,027 | $ | 3,031 | |||
Information and Technical Services | 1,115 | 1,097 | |||||
Segments total | 4,142 | 4,128 | |||||
Corporate and Other | 775 | 756 | |||||
Total Assets | $ | 4,917 | $ | 4,884 | |||
Page | 20
ITEM�2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In millions, except per share amounts, unless otherwise stated)
The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto included in this quarterly report on Form 10-Q as well as the audited Consolidated and Combined Financial Statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December�31, 2013, which provides additional information regarding the Company, our products and services, industry outlook and forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward looking statements.
OVERVIEW
Exelis is a diversified aerospace, defense, information and services company that leverages a greater than 50-year legacy of deep customer knowledge and technical expertise to deliver affordable mission-critical solutions in the areas of imaging and analysis, electronic warfare, air traffic solutions, positioning and navigation, communications and information systems, logistics, and technical services to military, government and commercial customers in the United States and globally. We are focused on strategic growth in the areas of: critical networks; intelligence, surveillance, reconnaissance (ISR) and analytics; electronic warfare; and composite aerostructures. The Company's customers include the U.S. Department of Defense (DoD) and its prime contractors, U.S. Government intelligence agencies, the National Aeronautics and Space Administration (NASA), the Federal Aviation Administration (FAA), allied foreign governments and domestic and foreign commercial customers. As a prime contractor, subcontractor, or preferred supplier, Exelis participates in many high priority defense and civil government programs in the United States and internationally. Exelis conducts most of its business with the U.S. Government, principally the DoD.
We operate in two segments: Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) Electronics and Systems, and Information and Technical Services. Our C4ISR Electronics and Systems segment provides engineered systems and solutions, including: ISR systems; integrated electronic warfare systems; radar and sonar systems; electronic attack and release systems; communications solutions; space systems; and composite aerostructures, for government and commercial customers around the world. Our Information and Technical Services segment provides a broad range of service solutions, including: systems integration; network design and development; air traffic management; cyber; intelligence; operations; sustainment; advanced engineering; logistics; and space launch and range-support, for a wide variety of U.S. military and U.S. Government customers.
Spin-off of Vectrus
On September 27, 2014, the Company completed the previously announced spin-off of part of its military and government services business ("Vectrus, Inc." or "Vectrus", formerly referred to as Mission Systems) through a pro rata distribution of Vectrus common stock to the Company's shareholders that has been structured to qualify as a tax-free transaction to Exelis and its shareholders. Vectrus began trading as an independent, publicly traded company on the New York Stock Exchange on September 29, 2014. Vectrus is part of the Companys Information and Technical Services segment and included the following major program areas: Infrastructure Asset Management; Logistics and Supply Chain Management; and Information Technology and Network Communication Services. As the spin-off was completed subsequent to the end of the Company's quarterly financial reporting period, this Form 10-Q includes Vectrus' financial results as part of our continuing operations.
Economic Opportunities, Challenges, and Risks
U.S. defense and other discretionary budgets have been under pressure as the United States continues to face economic challenges and as concerns over persistent U.S. fiscal deficits and the level of U.S. national debt continue to drive political debate. The Consolidated Appropriations Act of 2014, which was signed into law on January 17, 2014, provides $1.012 trillion in discretionary spending and adheres to the Bipartisan Budget Act of 2013. Within the $1.012 trillion in discretionary spending, the amount for national security and defense related spending for fiscal year 2014 was $520 billion, about $2 billion more than in fiscal year 2013. Within the $1.014 trillion in discretionary
Page | 21
spending for fiscal year 2015, the amount for national security and defense related spending increased slightly to $521 billion.
The Budget Control Act of 2011 (Budget Control Act) provided for a reduction in planned defense budgets and mandated substantial additional spending reductions through a process known as "sequestration." The sequestration spending reductions required for defense were approximately $43 billion for fiscal year 2013, increasing to approximately $55 billion for fiscal year 2014 and beyond. The combined effect of the Bipartisan Budget Act of 2013 and the Consolidated Appropriations Act of 2014 is a substantial alteration of sequestration in the near term. The Congressional Budget Office (CBO) reported that there would be no additional cuts, across the board cuts or sequestration in fiscal year 2014. This is the expectation, because Congress has enacted a fiscal year 2014 appropriations bill complying with the new defense and non-defense caps. The same could occur in fiscal year 2015 if Congress appropriates no more than the $1.014 trillion in discretionary spending and adheres to the revised defense and non-defense caps. By incorporating these alterations to the original Budget Control Act, the CBO still anticipates achievement of $539 billion in discretionary spending reductions from fiscal year 2016 to 2021.
Companies which derive substantial revenues from federal contracting will benefit from comprehensive legislation which implements fundamental multi-year changes that would prevent sequestration from continuing. The debate over how and when a solution may be reached over the as-yet unresolved sequestration matter remains a significant issue for the defense industry. Uncertainty by our customers related to potential changes in their appropriations and strategic priorities and continued spending reductions from sequestration could materially impact our business.
Programs related to the support of ongoing operations in Afghanistan are subject to changes in the level of U.S. commitment in the region. In May 2014, the Administration announced its plan to steadily reduce the U.S. military presence in Afghanistan over the next three years, to force levels of approximately 9,800 troops beginning in 2015, 5,000 troops beginning in 2016 and 500 troops beginning in 2017, down from over 60,000 U.S. troops in Afghanistan at the beginning of 2013. The U.S. military plans to maintain a limited presence at only two major operating bases after 2015.
The information provided above does not represent a complete list of known trends and uncertainties that could impact our business in either the near or long-term. It should, however, be considered along with the risk factors identified in Part 1, Item�1A under the caption Risk Factors in our Annual Report on Form 10-K for the year ended December�31, 2013 and our disclosure under the caption Forward-Looking and Cautionary Statements at the end of this section.
Executive Summary
Exelis reported revenue of $1.1 billion for the quarter ended September�30, 2014, a decrease of 6% compared to the corresponding period in 2013. The decrease in revenue was driven by a revenue decline of 12% within our Information and Technical Services segment primarily due to lower activity on our Afghanistan based contracts within our Infrastructure Asset Management program area. The decrease in revenue was partially offset by a 1% increase in revenue in our C4ISR Electronics and Systems segment.
Operating income for the three months ended September�30, 2014 was $96, reflecting a decrease of $37 or 28% compared to the corresponding prior year period primarily due to higher selling, general and administrative expenses and lower revenue. Operating margin decreased quarter-over-quarter to 9.0% from 11.7% primarily due to higher selling, general and administrative expenses resulting from the spin-off of Vectrus.
Further details related to the quarter are contained in the Discussion of Financial Results section.
Key Performance Indicators and Non-GAAP�Measures
Management reviews key performance indicators including revenue, segment operating income and margins, orders growth, and backlog, among others metrics on a regular basis. In addition, we consider certain additional measures to be useful to management and investors evaluating our operating performance for the periods presented, and provide a tool for evaluating our ongoing operations, liquidity and management of assets. This information can assist investors in assessing our financial performance and measures our ability to generate capital for deployment among
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competing strategic alternatives and initiatives, including, but not limited to, acquisitions and debt repayment. These metrics, however, are not measures of financial performance under accounting principles generally accepted in the United States of America (GAAP) and should not be considered a substitute for revenue, operating income, income from continuing operations, or net cash from continuing operations as determined in accordance with GAAP. We consider the following non-GAAP measure, which may not be comparable to similarly titled measures reported by other companies, to be a key performance indicator:
" | Adjusted net income defined as net income, adjusted to exclude items that include, but are not limited to, significant charges or credits that impact current results, but are not related to our ongoing operations, unusual and infrequent non-operating items and non-operating tax settlements or adjustments. A reconciliation of adjusted net income is provided below. |
� | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
�� | 2014 | 2013 | 2014 | 2013 | |||||||||||
Net income | $ | 52 | $ | 80 | $ | 165 | $ | 202 | |||||||
Separation costs related to the Vectrus spin-off, net of tax | 9 | 19 | |||||||||||||
Adjusted net income | $ | 61 | $ | 80 | $ | 184 | $ | 202 | |||||||
DISCUSSION OF FINANCIAL RESULTS
THREE AND NINE MONTHS ENDED SEPTEMBER�30, 2014 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER�30, 2013
Selected financial highlights are presented in the table below:
� | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
�� | 2014 | 2013 | Change�� | 2014 | 2013 | Change�� | |||||||||||||||
Product and service revenue | $ | 1,068 | $ | 1,141 | (6.4 | )% | $ | 3,230 | $ | 3,577 | (9.7 | )% | |||||||||
Cost of product and service revenue | 833 | 891 | (6.5 | )% | 2,544 | 2,799 | (9.1 | )% | |||||||||||||
Operating expense | 139 | 117 | 18.8 | �% | 398 | 444 | (10.4 | )% | |||||||||||||
Operating income | 96 | 133 | (27.8 | )% | 288 | 334 | (13.8 | )% | |||||||||||||
Operating margin | 9.0 | % | 11.7 | % | 8.9 | % | 9.3 | % | |||||||||||||
Interest expense, net | 9 | 10 | (10.0 | )% | 27 | 28 | (3.6 | )% | |||||||||||||
Other (income) expense, net | (1 | ) | 3 | (133 | )% | (5 | ) | 2 | (350 | )% | |||||||||||
Income tax expense | 36 | 40 | (10.0 | )% | 101 | 102 | (1.0 | )% | |||||||||||||
Effective income tax rate | 40.9 | % | 33.3 | % | 38.0 | % | 33.6 | % | |||||||||||||
Net income | $ | 52 | $ | 80 | (35.0 | )% | $ | 165 | $ | 202 | (18.3 | )% | |||||||||
Revenue
Revenue for the three and nine months ended September�30, 2014 decreased $73 or 6.4% and $347 or 9.7%, respectively, as compared to the same prior year periods. The following table illustrates revenue for our segments:
� | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
�� | 2014 | 2013 | Change�� | 2014 | 2013 | Change�� | |||||||||||||||
C4ISR Electronics�and Systems | $ | 503 | $ | 498 | 1.0 | �% | $ | 1,506 | $ | 1,515 | (0.6 | )% | |||||||||
Information�and Technical Services | 565 | 643 | (12.1 | )% | 1,724 | 2,062 | (16.4 | )% | |||||||||||||
Total Revenue | $ | 1,068 | $ | 1,141 | (6.4 | )% | $ | 3,230 | $ | 3,577 | (9.7 | )% | |||||||||
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Revenue from our C4ISR Electronics and Systems segment increased $5 for the three months ended September�30, 2014 as compared with the same period in 2013. The increase in revenue was primarily due to higher revenue on our Integrated Defensive Electronic Countermeasures (IDECM) products for military aircraft and our Electronic Support Measures (ESM) systems for the Royal Australian Navy of approximately $13 and $12, respectively, partially offset by lower revenue on our communication solutions products of approximately $20.
Revenue from our C4ISR Electronics and Systems segment decreased $9 for the nine months ended September�30, 2014 as compared with the same period in 2013. The decrease in revenue was primarily due to volume declines in Night Vision products of approximately $37. Additionally, revenue decreased on our Worldview-3 satellite imaging program by approximately $18, as this program was substantially completed in 2013. The decrease in revenue was partially offset by higher revenue on our IDECM products of approximately $44.
Revenue from our Information and Technical Services segment decreased $78 and $338 for the three and nine months ended September�30, 2014, respectively, as compared with the same periods in 2013. The decrease in revenue for the three and nine months ended September�30, 2014 was primarily due to lower net activity on our Infrastructure Asset Management program area contracts, primarily the Afghan National Security Forces (ANSF) Facilities Support and Logistics Civilian Augmentation Program (LOGCAP) programs, of approximately $34 and $168, respectively, and our Information Technology and Network Communication Services program area contracts, primarily the Operations Maintenance and Defense of Army Communications in Southwest Asia and Central Asia (OMDAC-SWACA) contract, of approximately $17 and $62, respectively. Revenue on Afghanistan based contracts declined due to site reductions and reduced service levels associated with U.S. military troop reductions. The decrease in revenue for the nine months ended September�30, 2014 was partially offset by higher revenue on our Automated Dependent Surveillance-Broadcast (ADS-B) contract of approximately $13.
Cost of Revenue and Operating Expenses
Cost of product and service revenue and other operating expenses are comprised of the following:
� | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
�� | 2014 | 2013 | Change���� | 2014 | 2013 | Change���� | |||||||||||||||
Cost of product revenue | $ | 356 | $ | 354 | 0.6 | �% | $ | 1,088 | $ | 1,091 | (0.3 | )% | |||||||||
% of product revenue | 70.8 | % | 71.1 | % | 72.2 | % | 72.0 | % | |||||||||||||
Cost of service revenue | $ | 477 | $ | 537 | (11.2 | )% | $ | 1,456 | $ | 1,708 | (14.8 | )% | |||||||||
% of service revenue | 84.4 | % | 83.5 | % | 84.5 | % | 82.8 | % | |||||||||||||
Selling, general and administrative expenses | $ | 117 | $ | 100 | 17.0 | �% | $ | 344 | $ | 337 | 2.1 | �% | |||||||||
% of total revenue | 11.0 | % | 8.8 | % | 10.7 | % | 9.4 | % | |||||||||||||
Research and development expenses | $ | 18 | $ | 11 | 63.6 | �% | $ | 43 | $ | 39 | 10.3 | �% | |||||||||
% of total revenue | 1.7 | % | 1.0 | % | 1.3 | % | 1.1 | % | |||||||||||||
Restructuring and asset impairment charges | $ | 4 | $ | 6 | (33.3 | )% | $ | 11 | $ | 68 | (83.8 | )% | |||||||||
% of total revenue | 0.4 | % | 0.5 | % | 0.3 | % | 1.9 | % | |||||||||||||
Cost of Product and Service Revenue
The increase in cost of product revenue of $2 or 0.6% for the three months ended September�30, 2014 as compared to the same period in 2013 was primarily due to higher revenue. The cost of product revenue as a percentage of product revenue decreased for the three months ended September�30, 2014 as compared to the corresponding period in 2013 primarily due to a net revenue mix of higher margin products.
The decrease in cost of product revenue of $3 or 0.3% for the nine months ended September�30, 2014 as compared to the same period in 2013 was primarily due to lower revenue. The cost of product revenue as a percentage of product revenue increased for the nine months ended September�30, 2014 as compared to the corresponding period in 2013 primarily due to a net revenue mix of lower margin products.
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The decrease in cost of service revenue of $60 or 11.2% and $252 or 14.8% for the three and nine months ended September�30, 2014, respectively, as compared to the same periods in 2013 was primarily due to lower activity within our Information and Technical Services segment. The cost of service revenue as a percentage of service revenue increased for the three and nine months ended September�30, 2014 as compared to the corresponding periods in 2013 primarily due to a net revenue mix of lower margin services, including lower activity on certain higher margin Afghanistan based contracts.
Selling, General�& Administrative (SG&A) Expenses
SG&A expenses as a percentage of total revenue were 11.0% and 10.7% for the three and nine months ended September�30, 2014, respectively, as compared to 8.8% and 9.4%, respectively, during the same periods in 2013. The increase in SG&A expenses as a percentage of total revenue for the three and nine months ended September�30, 2014 was primarily due to higher SG&A expenses and lower revenue. For the three and nine months ended September�30, 2014, SG&A expenses increased as compared to the same periods in 2013 primarily due to separation costs resulting from the spin-off of Vectrus.
Research and Development (R&D) Expenses
The increase in R&D expenses of $7 or 63.6% and $4 or 10.3% for the three and nine months ended September�30, 2014, respectively, as compared to the same periods in 2013 was primarily due to the timing of new R&D projects.
Restructuring and Asset Impairment Charges
The decrease in restructuring and asset impairment charges of $2 and $57 for the three and nine months ended September�30, 2014, respectively, as compared to the same periods in 2013 was primarily due to a restructuring action started in the first quarter of 2013 to reduce the size of our workforce and consolidate our facilities footprint to align our cost structure more closely to customer and market conditions, which was substantially completed by the end of 2013. During the three and nine months ended September�30, 2014, restructuring and asset impairment charges primarily related to employee severance, and to a lesser extent, lease cancellation and other costs associated with the consolidation of certain facilities.
Operating Income
The following table illustrates the operating income results of our business segments, including operating margin results.
� | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
�� | 2014 | 2013 | Change���� | 2014 | 2013 | Change���� | |||||||||||||||
C4ISR Electronics�and Systems | $ | 59 | $ | 69 | (14.5 | )% | $ | 162 | $ | 128 | 26.6 | �% | |||||||||
Operating margin | 11.7 | % | 13.9 | % | 10.8 | % | 8.4 | % | |||||||||||||
Information and Technical Services | 37 | 64 | (42.2 | )% | 126 | 206 | (38.8 | )% | |||||||||||||
Operating margin | 6.5 | % | 10.0 | % | 7.3 | % | 10.0 | % | |||||||||||||
Total operating income | $ | 96 | $ | 133 | (27.8 | )% | $ | 288 | $ | 334 | (13.8 | )% | |||||||||
Total operating margin | 9.0 | % | 11.7 | % | 8.9 | % | 9.3 | % | |||||||||||||
Operating income at our C4ISR Electronics and Systems segment for the three months ended September�30, 2014 decreased $10 or 14.5% as compared to the same period in 2013. Operating income as a percentage of revenue for the three months ended September�30, 2014 was 11.7% as compared to 13.9% for the same period in 2013. The decrease in operating margin was primarily due to higher SG&A expenses for the three months ended September�30, 2014 as compared to the same period in 2013.
Operating income at our C4ISR Electronics and Systems segment for the nine months ended September�30, 2014 increased $34 or 26.6% as compared to the same period in 2013. Operating income as a percentage of revenue for the nine months ended September�30, 2014 was 10.8% as compared to 8.4% for the same period in 2013. The increase in operating margin was primarily due to lower restructuring charges for the nine months ended September�30, 2014 as compared to the same period in 2013.
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Operating income at our Information and Technical Services segment for the three and nine months ended September�30, 2014 decreased $27 or 42.2% and $80 or 38.8%, respectively, as compared to the same periods in 2013. Operating income as a percentage of revenue for the three and nine months ended September�30, 2014 was 6.5% and 7.3%, respectively, as compared to 10.0% for the same periods in 2013. The decrease in operating margin was primarily due to higher SG&A expenses and higher cost of service revenue as a percentage of service revenue for the three and nine months ended September�30, 2014 as compared to the same periods in 2013.
During the performance of long-term sales contracts, estimated final contract prices and costs are reviewed periodically and revisions are made as required and recorded in income in the period in which they are determined. Changes in estimated revenue, cost of revenue and the related effect to operating income are recognized using a cumulative catch-up adjustment which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a contracts percent complete. Net favorable cumulative catch-up adjustments related to prior periods increased operating income by approximately $6 and $6, for the three and nine months ended September�30, 2014, respectively, and by approximately $16 and $83 for the three and nine months ended September�30, 2013, respectively. Productivity improvements and contract pricing adjustments primarily contributed to the net favorable cumulative catch-up adjustments in the current three and nine month periods.
Impact to Operating Income from Defined Benefit Plan Expense
We recorded net periodic benefit cost of $14 and $48 for the three and nine months ended September�30, 2014, respectively, as compared to $21 and $69, respectively, during the same periods in 2013. The decrease in net periodic benefit cost was primarily attributable to better than expected return on plan assets in 2013, which resulted in lower amortization of net actuarial loss for the three and nine months ended September�30, 2014 as compared to the same periods in 2013.
Interest Expense, Net
We recorded interest expense, net, of $9 and $27 for the three and nine months ended September�30, 2014, respectively, as compared to $10 and $28, respectively, during the same periods in 2013. Interest expense, net, is primarily related to our senior notes.
Other (Income) Expense, Net
We recorded other income, net, of $1 and $5 for the three and nine months ended September�30, 2014, respectively, as compared to other expense, net, of $3 and $2, respectively, during the same periods in 2013. The period-over-period changes were not significant.
Income Tax Expense
We recorded income tax expense of $36 and $101 for the three and nine months ended September�30, 2014, respectively, which represented effective income tax rates of 40.9% and 38.0%, respectively, as compared to $40 or 33.3% and $102 or 33.6%, respectively, during the same periods in 2013. The increase in the 2014 quarterly and year-to-date effective income tax rates as compared to the same periods in 2013 was primarily due to the unfavorable impact of discrete items related to tax credit adjustments recorded in the third quarter of 2014 and the expiration of the federal research and development tax credit at the end of 2013. The 2013 year-to-date effective income tax rate also included the favorable impact of a discrete item related to the renewal of the 2012 federal research and development tax credit.
Backlog
Total backlog includes both funded backlog (firm orders for which funding is contractually obligated by the customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the customer). Unfunded backlog represents firm orders, potential options on multi-year contracts and multi-year commercial contracts when demand is supported by customer backlog, and excludes potential orders under indefinite delivery / indefinite quantity (IDIQ) contracts. Backlog is converted into revenue as work is performed or deliveries are made. The level of order activity related to defense programs can be affected by the timing of government funding
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authorizations and project evaluation cycles. Year-over-year comparisons could, at times, be impacted by these factors, among others.
Funded orders received decreased $0.7 billion, to $3.7 billion, during the nine months ended September�30, 2014 as compared to the same period in 2013, primarily due to the absence of several large multi-year funded awards received in the first nine months of 2013 on our Middle East and Afghanistan based programs within our Information and Technical Services segment and a lower volume of funded awards for communication solutions products within our C4ISR Electronics and Systems segment. The decrease in funded orders was partially offset by higher funded orders for GPS satellite payloads within our C4ISR Electronics and Systems segment. At September�30, 2014, total backlog was $8.9 billion compared to $9.4 billion at December�31, 2013. The decrease in total backlog relates primarily to Middle East and Afghanistan based programs within our Information and Technical Services segment, partially offset by GPS and environmental satellite payloads awards within our C4ISR Electronics and Systems segment.
Backlog consisted of the following:
(In billions) | September�30, 2014 | December�31, 2013 | |||||
Funded backlog | $ | 3.9 | $ | 3.4 | |||
Unfunded backlog | 5.0 | 6.0 | |||||
Total backlog | $ | 8.9 | $ | 9.4 | |||
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We expect to fund our ongoing working capital, capital expenditures, strategic investments, and financing requirements through cash flows from operations, cash on hand and access to capital markets. If our cash flows from operations are less than we expect, we may need to access the short or long-term capital markets. We believe our $600 credit facility and commercial paper program will permit us to finance our operations on acceptable terms and conditions.
Our access to, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors, including: (i)�our credit ratings or absence of a credit rating, (ii)�the liquidity of the overall capital markets, and (iii)�the current state of the economy. We cannot assure that such financing will be available to us on acceptable terms or that such financing will be available at all.
A portion of our cash is held by our foreign subsidiaries. We manage our cash requirements considering available funds among our subsidiaries and the cost effectiveness with which those funds can be accessed. We continue to look for opportunities to access cash balances in excess of local operating requirements to meet liquidity needs in a cost-efficient manner.
Funding of Pension Plans
Funding requirements under applicable laws and regulations are a major consideration in making contributions to our U.S. pension plans. While the Company has significant discretion in making voluntary contributions, the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006 and further amended by the Worker, Retiree, and Employer Recovery Act of 2008, the Moving Ahead for Progress in the 21st Century Act and applicable Internal Revenue Code regulations, mandate minimum funding thresholds. Failure to satisfy the minimum funding thresholds could result in restrictions on our ability to amend the plan or make benefit payments. With respect to U.S. qualified pension plans, we intend to contribute annually not less than the required minimum funding thresholds.
The Highway and Transportation Funding Act of 2014 (HATFA), which was signed into law on August 8, 2014, modified the interest rate stabilization provision of Moving Ahead for Progress in the 21st Century Act. We expect that this provision will reduce our minimum funding thresholds for the remainder of 2014 and for the next several years.
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At December�31, 2013, our defined benefit pension plans were underfunded by $1.2 billion. During the nine months ended September�30, 2014, we made total contributions of $123 to our qualified pension plans. We currently anticipate making additional contributions to our qualified pension plans in the range of $10 to $20 during the remainder of 2014.
Future required contributions will depend primarily on the actual annual return on assets and the discount rate used to measure the benefit obligation at the end of each year. Depending on these factors, and the resulting funded status of our pension plans, the level of future statutory minimum contributions could be material.
Dividends
Our Board of Directors will review and approve the declaration and distribution of any future dividends based on an analysis of many factors, including our operating performance and outlook, financial condition, available liquidity and expected future requirements for cash and capital resources. Moreover, if we determine to pay any dividend in the future, there can be no assurance that we will continue to pay such dividends.
On August 12, 2014, our Board of Directors declared a cash dividend of $0.10 per share, payable on October�1, 2014 to shareholders of record on August 29, 2014. During the nine months ended September�30, 2014, we declared three quarterly cash dividends totaling $60 or $0.31 per share.
Sources and Uses of Liquidity
The following table provides the net cash provided by or used in operating activities, investing activities and financing activities.
� | Nine Months Ended September 30, | ||||||
�� | 2014 | 2013 | |||||
Operating activities | $ | 71 | $ | 118 | |||
Investing activities | (56 | ) | (64 | ) | |||
Financing activities | 42 | (35 | ) | ||||
Foreign exchange | (2 | ) | (2 | ) | |||
Net change in cash and cash equivalents | $ | 55 | $ | 17 | |||
Net cash provided by operating activities decreased $47 for the nine months ended September�30, 2014 as compared to the same period in 2013, primarily due to changes in advance payments and billings in excess of costs of $48, changes in deferred taxes of $45, and a decrease in restructuring and asset impairment charges net of payments for restructuring of $38, partially offset by changes in other liabilities of $75.
Net cash used in investing activities decreased $8 for the nine months ended September�30, 2014 as compared to the same period in 2013, primarily due to lower capital expenditures of $20, partially offset by higher net cash paid for acquisitions of $6.
Net cash provided by financing activities increased $77 for the nine months ended September�30, 2014 as compared to the same period in 2013, primarily due to proceeds from the Vectrus term loan of $140, partially offset by an increase in cash paid for common stock repurchases of $48 and dividend payments to our shareholders of $21.
Capital Resources
At September�30, 2014, the Company held cash and cash equivalents of $524, which included $129 held by foreign subsidiaries, and had a $600 revolving credit facility which expires in October 2015. There were no borrowings outstanding under the credit facility and there was no commercial paper outstanding under our commercial paper program as of September�30, 2014.
Borrowings under the credit facility would be unsecured and bear interest at rates based, at our option, on the Eurodollar rate or a bank defined alternative base rate. Each banks obligation to make loans under the credit facility is subject to, among other things, our compliance with various representations, warranties and covenants.
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The Company's commercial paper program is fully supported by available borrowing capacity under our credit facility. As with all other financing programs, our access to the commercial paper market will be impacted by many factors, including our credit ratings, liquidity of the capital markets, and state of the economy.�As such, we cannot assure that we will have continued access to the commercial paper market or that the terms of the commercial paper will be acceptable to us.
We have outstanding long-term debt consisting of $250 of 4.25% senior notes due in 2016 and $400 of 5.55% senior notes due in 2021. Interest on the senior notes is payable on April�1 and October�1 of each year. The senior notes are senior unsecured obligations and rank equally with all of our existing and future senior unsecured indebtedness. The senior notes have covenants that restrict our ability to, subject to exceptions, incur indebtedness secured by liens or engage in sale and leaseback transactions, and the senior notes are subject to customary events of default.
In connection with the spin-off of Vectrus, Vectrus, a wholly-owned subsidiary of the Company, entered into a credit agreement that includes a $75 five-year senior secured revolving credit facility and $140 five-year senior secured term loan. The revolving credit facility is available for Vectrus' working capital, capital expenditures and other general corporate purposes and there were no borrowings outstanding under this facility at September 30, 2014. Vectrus used the net proceeds from the term loan to pay a net cash distribution to a subsidiary of Exelis. The revolving credit facility and term loan will remain with Vectrus subsequent to the spin-off.
The credit facility, commercial paper, senior notes and Vectrus debt are discussed further in Note 11, Debt, in the notes to the unaudited Condensed Consolidated Financial Statements.
Contractual Obligations
There have been no material changes to our contractual obligations from those discussed in our Annual Report on Form 10-K for the year ended December�31, 2013, except for the Vectrus term loan, which will remain with Vectrus subsequent to the spin-off. The following table represents the contractual obligations related to the Vectrus term loan as at September�30, 2014:
Payments due by period | ||||||||||||
Total | Less�than 1 year | 1-3�Years | 3-5�Years | |||||||||
Debt (1) | $ | 140 | $ | 11 | $ | 28 | $ | 101 | ||||
Interest payments (2) | 17 | 4 | 8 | 5 | ||||||||
Total contractual obligations | $ | 157 | $ | 15 | $ | 36 | $ | 106 | ||||
(1) | See Note�11, Debt, in the notes to the unaudited Condensed Consolidated Financial Statements for additional information related to the Vectrus term loan. |
(2) | Amounts represent estimate of future interest payments on the Vectrus term loan as of September 30, 2014. |
Off-Balance Sheet Arrangements
At September�30, 2014, we had no significant off-balance sheet arrangements other than operating leases and certain indemnifications. There have been no material changes to our operating leases from those discussed in our Annual Report on Form 10-K for the year ended December�31, 2013. We do not have a liability recorded for our historic indemnifications and are not aware of any claims or other information that we believe would give rise to material payments under such indemnities. We are not aware of any claims or other circumstances that would give rise to material payments to ITT or Xylem Inc. under the indemnities that we provide to them pursuant to various separation arrangements entered into in connection with the ITT Spin-off.
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CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Estimates are revised as additional information becomes available. Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results in these areas could differ from managements estimates under different assumptions or conditions.
There have been no significant changes in our critical accounting policies, estimates and judgments as disclosed in our Annual Report on Form 10-K for the year ended December�31, 2013.
Recent Accounting Pronouncements and Accounting Standards Updates
See Note 2, Recent Accounting Pronouncements, to the unaudited Condensed Consolidated Financial Statements for information related to recent accounting pronouncements and accounting standards updates.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Some of the information included herein includes forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995 (the Act ). 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 Companys historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Item�1A, Risk Factors, and elsewhere in our Annual Report on Form 10-K for the year ended December�31, 2013, and those described from time to time in our future reports filed with the Securities and Exchange Commission.
ITEM�3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in our market risk as discussed in our Annual Report on Form 10-K for the year ended December�31, 2013.
ITEM�4. CONTROLS AND PROCEDURES
The Companys management, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of September�30, 2014. Based on such evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that, as of September�30, 2014, the Companys disclosure controls and procedures were effective to accomplish their objectives.
We have evaluated the changes in our internal control over financial reporting that occurred during the three months ended September�30, 2014 and concluded that no change occurred in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART�II.�OTHER INFORMATION
ITEM�1. LEGAL PROCEEDINGS
From time to time, we are involved in legal proceedings that are incidental to the operation of our businesses. Some of these proceedings seek remedies relating to environmental matters, personal injury claims, employment and pension matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures.
Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claim, we do not expect that any asserted or unasserted legal claims or proceedings, individually or in the aggregate, will have a material adverse effect on our cash flow, results of operations, or financial condition.
See Note 15, Commitments and Contingencies, to the unaudited Condensed Consolidated Financial Statements for further information.
ITEM�1A.�RISK FACTORS
The Risk Factors section, under Part I, Item�1A, of our Annual Report on Form 10-K for the year ended December�31, 2013 describes risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results, and future prospects. We do not believe that there have been any material changes to the risk factors previously disclosed.
ITEM�2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(In millions, except per share amounts, unless otherwise stated)
There were no sales of unregistered equity securities during the quarter ended September�30, 2014. There were also no repurchases of our common stock that is registered pursuant to Section 12 of the Securities Exchange Act of 1934 during the quarter ended September�30, 2014.
We have a share repurchase program, which was approved by the Board of Directors and announced by the Company on December 11, 2012, for the repurchase of our outstanding common stock, from time-to-time, up to an authorized amount of $100. Under the program, management has discretion to determine the dollar amount of shares to be repurchased and the timing of any repurchases in compliance with applicable law and regulation. The share repurchase program expires on December�31, 2015. As of September�30, 2014, we had repurchased a total of 3.9�shares of our common stock under the program for $69 and had remaining authorization of $31 for future share repurchases. There were no repurchases of our common stock other than in connection with this share repurchase program.
ITEM�3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM�4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM�5. OTHER INFORMATION
None.
ITEM�6. EXHIBITS
See the Exhibit�Index for a list of exhibits filed herewith.
Page | 31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
�
� | EXELIS INC. | |
(Registrant) | ||
October�31, 2014 | /s/����GREGORY P. KUDLA | |
(Date) | Gregory P. Kudla | |
Chief Accounting Officer | ||
(Principal Accounting Officer) | ||
�
Page | 32
EXHIBIT�INDEX
�
EXHIBIT NUMBER | �� | DESCRIPTION | �� | LOCATION |
(2.1) | Distribution Agreement between Vectrus, Inc. and Exelis Inc. dated as of September 25, 2014 | Incorporated by reference to Exhibit 2.1 of Exelis Inc.s Form 8-K Current Report filed on September 29, 2014 (CIK No. 1524471, File No. 1-35228). | ||
(3.1) | �� | Amended and Restated Articles of Incorporation of Exelis Inc. | �� | Incorporated by reference to Exhibit 3.1 of Exelis Inc.s Form 8-K Current Report filed on May 9, 2014 (CIK No. 1524471, File�No.�1-35228). |
(3.2) | �� | Amended and Restated By-laws of Exelis�Inc. | �� | Filed herewith. |
(4.1) | �� | Indenture, dated as of September�20, 2011, between Exelis Inc., ITT Corporation, as initial guarantor, and Union Bank, N.A., as trustee | �� | Incorporated by reference to Exhibit 4.1 of ITT Corporations Form 8-K Current Report filed on September 21, 2011 (CIK No. 216228, File�No.�1-5672). |
(4.2) | �� | Form of Exelis Inc. 4.250%�Senior Notes due 2016 | �� | Incorporated by reference to Exhibit 4.5 of Exelis Inc.s Form S-4 Registration Statement filed on May 25, 2012 (CIK�No.�1524471, File�No.�333-181682). |
(4.3) | �� | Form of Exelis Inc. 5.550%�Senior Notes due 2021 | �� | Incorporated by reference to Exhibit 4.6 of Exelis Inc.s Form S-4 Registration Statement filed on May 25, 2012 (CIK�No.�1524471, File�No.�333-181682). |
(10.1) | Employee Matters Agreement between Vectrus, Inc. and Exelis Inc. dated as of September 25, 2014 | Incorporated by reference to Exhibit 10.1 of Exelis Inc.s Form 8-K Current Report filed on September 29, 2014 (CIK No. 1524471, File No. 1-35228). | ||
(10.2) | Tax Matters Agreement between Vectrus, Inc. and Exelis Inc. dated as of September 25, 2014 | Incorporated by reference to Exhibit 10.2 of Exelis Inc.s Form 8-K Current Report filed on September 29, 2014 (CIK No. 1524471, File No. 1-35228). | ||
(10.3) | Transition Services Agreement between Vectrus, Inc. and Exelis Inc. dated as of September 25, 2014 | Incorporated by reference to Exhibit 10.3 of Exelis Inc.s Form 8-K Current Report filed on September 29, 2014 (CIK No. 1524471, File No. 1-35228). | ||
(10.4) | Transitional Trademark License Agreement between Vectrus, Inc. and Exelis Inc. dated as of September 25, 2014 | Incorporated by reference to Exhibit 10.4 of Exelis Inc.s Form 8-K Current Report filed on September 29, 2014 (CIK No. 1524471, File No. 1-35228). | ||
(10.5) | Technology License Agreement between Vectrus, Inc. and Exelis Inc. dated as of September 25, 2014 | Incorporated by reference to Exhibit 10.5 of Exelis Inc.s Form 8-K Current Report filed on September 29, 2014 (CIK No. 1524471, File No. 1-35228). | ||
(10.6) | Credit Agreement by and among Vectrus, Inc., Exelis Systems Corporation, as the Borrower, the Lenders and Issuing Banks party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, dated as of September 17, 2014 | Incorporated by reference to Exhibit 10.1 of Vectrus, Inc.s Form 8-K Current Report filed on September 19, 2014 (CIK No. 1601548, File No. 1-36341). | ||
Page | 33
EXHIBIT NUMBER | �� | DESCRIPTION | �� | LOCATION |
(11) | �� | Statement re computation of per share earnings | �� | Information required to be presented in Exhibit 11 is provided under Earnings Per Share in Note 4 to the Condensed Consolidated Financial Statements in Part I, Item 1 Financial Statements of Exelis Inc.s Quarterly Report on Form 10-Q for the period ended September 30, 2014 in accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification 260, Earnings Per Share. |
(12) | �� | Statement re computation of ratios | �� | Filed herewith. |
(31.1) | �� | Certification pursuant to Rule�13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section�302 of the Sarbanes-Oxley Act of 2002 | �� | Filed herewith. |
(31.2) | �� | Certification pursuant to Rule�13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section�302 of the Sarbanes-Oxley Act of 2002 | �� | Filed herewith. |
(32.1) | �� | Certification Pursuant to 18�U.S.C. Section�1350, as adopted pursuant to Section�906 of the Sarbanes-Oxley Act of 2002 | �� | This Exhibit is intended to be furnished in accordance with Regulation S-K Item 601(b) (32) (ii) and shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference. |
(32.2) | �� | Certification Pursuant to 18�U.S.C. Section�1350, as adopted pursuant to Section�906 of the Sarbanes-Oxley Act of 2002 | �� | This Exhibit is intended to be furnished in accordance with Regulation S-K Item 601(b) (32) (ii) and shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference. |
(101) | �� | The following materials from Exelis Inc.s Quarterly Report on Form�10-Q for the quarterly period ended September 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations, (ii)�Condensed Consolidated Statements of Comprehensive Income, (iii)�Condensed Consolidated Balance Sheets, (iv)�Condensed Consolidated Statements of Cash Flows and (v)�Notes to Condensed Consolidated Financial Statements. | �� | Submitted electronically with this Report. |
�
�
Page | 34
EXHIBIT�3.2
AMENDED AND RESTATED BY-LAWS
of
Exelis Inc.
of
Exelis Inc.
1. | SHAREHOLDERS. |
1.1.����Place of Shareholders Meetings. All meetings of the shareholders of Exelis Inc. (the Corporation ) shall be held at such place or places, within or outside the state of Indiana, as may be fixed by the Corporations Board of Directors (the Board , and each member thereof a Director ) from time to time or as shall be specified in the respective notices thereof.
1.2.����Day and Time of Annual Meetings of Shareholders. An annual meeting of shareholders shall be held at such place (within or outside the state of Indiana), date and hour as shall be determined by the Board and designated in the notice thereof. Failure to hold an annual meeting of shareholders at such designated time shall not affect otherwise valid corporate acts or work a forfeiture or dissolution of the Corporation.
1.3.����Purposes of Annual Meetings. (a) At each annual meeting, the shareholders shall elect the members of the Board for the succeeding term. At any such annual meeting any business properly brought before the meeting may be transacted.
(b)����To be properly brought before an annual meeting, business must be (i) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Board, (ii) otherwise properly brought before the meeting by or at the direction of the Board or (iii) otherwise properly brought before the meeting by a shareholder. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given written notice thereof, either by personal delivery or by United States mail, postage prepaid, to the Secretary, received at the principal executive offices of the Corporation, not less than 90 calendar days nor more than 120 calendar days prior to the date of the Corporations proxy statement released to shareholders in connection with the previous years annual meeting; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting was changed by more than 30 days from the anniversary date of the previous years annual meeting, notice by the shareholder must be so received not earlier than 120 calendar days prior to such annual meeting and not later than 90 calendar days prior to such annual meeting or 10 calendar days following the date on which public announcement of the date of the meeting is first made. In no event shall the public announcement of an adjournment or postponement of a meeting commence a new time period, or extend any time period, for the giving of written notice. Any such notice shall set forth as to each matter the shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting and, in the event that such business includes a proposal to amend either the Articles of Incorporation or By-laws of the Corporation, the language of the proposed amendment, (ii) the name and address of the shareholder proposing such business and the beneficial owner, if any, on whose behalf the proposal is made, (iii) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business, (iv) any material interest of the shareholder, and the beneficial owner, if any, on whose behalf the proposal is made, in such business, (v) if the shareholder or beneficial owner, if any, intends or is part of a group that intents to (x) deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporations outstanding capital stock required to approve or adopt the proposal or (y) otherwise solicit proxies or votes in support of such shareholders proposal, a representation to that effect, (vi) any other information relating to such shareholder and beneficial owner, if any, required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for the proposal, pursuant to and in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder, (vii) a description of any agreement, arrangement or understanding with respect to the proposal and/or the voting of shares of any class or series of stock of the Corporation between or among the shareholder giving the notice, the beneficial owner, if any, on whose behalf the proposal is made, any of their respective affiliates or associates and/or any others acting in concert with any of the foregoing (collectively, Proponent Persons , which term, for purposes of Section 2.2 herein, shall include each nominee (and his or her respective affiliates or associates and/or any others acting in concert with
1
��������
such nominee) and shall be defined as if the foregoing clause had, in each case, replaced the word proposal with the word nomination ); and (viii) a description of any agreement, arrangement or understanding (including without limitation any swap or other derivative or short position, profits interest, hedging transaction, borrowed or loaned shares, any contract to purchase or sell, acquisition or grant of any option, right or warrant to purchase or sell, or other instrument) to which any Proponent Person is a party, the intent or effect of which may be (x) to transfer to or from any Proponent Person, in whole or in part, any of the economic consequences of ownership of any security of the Corporation, (y) to increase or decrease the voting power of any Proponent Person with respect to shares of any class or series of capital stock of the Corporation and/or (z) to provide any Proponent Person, directly or indirectly, with the opportunity to profit or share in any profit derived from, or to otherwise benefit economically from, or to mitigate any loss resulting from, the value (or any increase or decrease in the value) of any security of the Corporation. A shareholder providing notice of business proposed to be brought before a meeting (whether given pursuant to this Section 1.3(b) or Section 1.4 of the By-Laws) shall update and supplement such notice from time to time to the extent necessary so that the information provided or required to be provided in such notice shall be true and correct as of the record date for the meeting and as of the date that is fifteen calendar days prior to the meeting or any adjournment or postponement thereof; such update and supplement shall be delivered in writing to the Secretary of the Corporation at the principal executive offices of the Corporation not later than five (5) days after the record date for the meeting (in the case of any update and supplement required to be made as of the record date), and not later than ten calendar days prior to the date for the meeting or any adjournment or postponement thereof (in the case of any update and supplement required to be made as of fifteen calendar days prior to the meeting or any adjournment or postponement thereof). The foregoing notice requirements shall be deemed satisfied by a shareholder if the shareholder has notified the Corporation of his or her intention to present a proposal at an annual meeting and such shareholders proposal has been included in a proxy statement that has been prepared by management of the Corporation to solicit proxies for such annual meeting; provided, however, that, if such shareholder does not appear or send a qualified representative to present such proposal at such annual meeting, the Corporation need not present such proposal for a vote at such meeting, notwithstanding that proxies in respect of such vote may have been received by the Corporation. No business shall be conducted at an annual meeting of shareholders except in accordance with this Section 1.3(b), and the chairman of any annual meeting of shareholders may refuse to permit any business to be brought before an annual meeting without compliance with the foregoing procedures or if the shareholder solicits proxies in support of such shareholders proposal without such shareholder having made the representation required by clause (v) of the preceding sentence.
1.4.����Special Meetings of Shareholders. (a) Except as otherwise expressly required by applicable law, special meetings of the shareholders or of any class or series entitled to vote may be called for any purpose or purposes by the Chairman, by a majority vote of the entire Board or by the Secretary of the Corporation in accordance with these By-Laws and the Corporations Articles of Incorporation to be held at such place (within or outside the state of Indiana), date and hour as shall be determined by the Board and designated in the notice thereof. Only such business as is specified in the notice of any special meeting of the shareholders shall come before such meeting.
(b)����A special meeting of shareholders shall be called by the Secretary of the Corporation at the written request or requests (each, a Special Meeting Request and, collectively, the Special Meeting Requests ) of shareholders who are shareholders of record having, as of the date on which such Special Meeting Request is delivered to the Secretary of the Corporation, an aggregate net long position (as defined in Article Fifth of the Articles of Incorporation) of at least twenty-five percent (25%) of the voting power of the outstanding capital stock of the corporation entitled to vote on the matter or matters to be brought before the proposed special meeting (the Requisite Percentage ) if such Special Meeting Request complies with the requirements of this Section 1.4(b) and all other applicable sections of these By-Laws and the Corporations Articles of Incorporation. The Board shall determine in good faith whether all requirements set forth in these By-Laws have been satisfied and such determination shall be binding on the Corporation and its shareholders. A Special Meeting Request must be delivered by hand or by mail by registered U.S. mail or courier service, postage pre-paid, to the attention of the Secretary during regular business hours. A Special Meeting Request to the Secretary shall be signed and dated by each shareholder of record (or a duly authorized agent of such shareholder) requesting the special meeting (each, a Requesting Shareholder ), shall comply with the shareholder notice and information requirements for annual
2
��������
meetings set forth in Section 1.3(b) and, if applicable, the shareholder notice and information requirements for nominations of a person or persons for election as Director(s) as set forth in Section 2.2, and shall also include (i) a statement of the specific purpose or purposes of the special meeting, (ii) the matter(s) proposed to be acted on at the special meeting, (iii) the reasons for conducting such business at the special meeting, (iv) the text of any resolutions proposed for consideration, (v) an acknowledgment by the Requesting Shareholder(s) and the beneficial owners, if any, on whose behalf the Special Meeting Request(s) are being made that any reduction in the aggregate net long position of the Requesting Shareholder(s) below the Requisite Percentage following the delivery of the Special Meeting Request shall constitute a revocation of such Special Meeting Request, and (vi) documentary evidence that the Requesting Shareholders own the Requisite Percentage as of the date of such written request to the Secretary; provided, however, that, if the Requesting Shareholders are not the beneficial owners of the shares representing the Requisite Percentage, then to be valid, the Special Meeting Request(s) must also include documentary evidence (or, if not simultaneously provided with the Special Meeting Request(s), such documentary evidence must be delivered to the Secretary within ten (10) business days after the date on which the Special Meeting Request(s) are delivered to the Secretary) that the beneficial owners on whose behalf the Special Meeting Request(s) are made beneficially own the Requisite Percentage as of the date on which such Special Meeting Request(s) are delivered to the Secretary. In addition, the Requesting Shareholders and the beneficial owners, if any, on whose behalf the Special Meeting Request(s) are being made shall promptly provide any other information reasonably requested by the Corporation.
(c)����Notwithstanding the foregoing provisions of this Section 1.4, a special meeting requested by shareholders shall not be held if (i) the Special Meeting Request does not comply with this Section 1.4, (ii) the Special Meeting Request relates to an item of business that is not a proper subject for shareholder action under applicable law, (iii) the Special Meeting Request is received by the Secretary during the period commencing ninety calendar days prior to the first anniversary of the date of the immediately preceding annual meeting and ending on the date of the next annual meeting, (iv) an annual or special meeting of shareholders that included an identical or substantially similar item of business ( Similar Business ) was held not more than one hundred twenty calendar days before the Special Meeting Request was received by the Secretary, (v) the Board or the Chairman of the Board has called or calls for an annual or special meeting of shareholders to be held within ninety calendar days after the Special Meeting Request is received by the Secretary and the business to be conducted at such meeting includes the Similar Business, or (vi) the Special Meeting Request was made in a manner that involved a violation of Regulation 14A under the Securities Exchange Act of 1934, as amended, or other applicable law. For purposes of this Section 1.4(c), the nomination, election or removal of Directors shall be deemed to be Similar Business with respect to all items of business involving the nomination, election or removal of Directors, changing the size of the Board and filling of vacancies and/or newly created directorships resulting from any increase in the authorized number of Directors. The Board shall determine in good faith whether the requirements set forth in this Section 1.4(c) have been satisfied.
(d)����In determining whether a special meeting of shareholders has been requested by the record holders of shares representing in the aggregate at least the Requisite Percentage, multiple Special Meeting Requests delivered to the Secretary will be considered together only if (i) each Special Meeting Request identifies substantially the same purpose or purposes of the special meeting and substantially the same matters proposed to be acted on at the special meeting (in each case as determined in good faith by the Board), and (ii) such Special Meeting Requests have been dated and delivered to the Secretary within sixty (60) days of the earliest dated Special Meeting Request. A Requesting Shareholder may revoke a Special Meeting Request at any time by written revocation delivered to the Secretary and if, following such revocation, there are outstanding un-revoked requests from Requesting Shareholders holding less than the Requisite Percentage, the Board may, in its discretion, cancel the special meeting. If none of the Requesting Shareholders appears or sends a duly authorized agent to present the business to be presented for consideration that was specified in the Special Meeting Request, the corporation need not present such business for a vote at such special meeting.
(e)����Special meetings shall be held at such date, time and place as may be fixed by the Board in accordance with these by-laws; provided, however, that in the case of a special meeting requested by shareholders, the date of any such special meeting shall not be more than ninety calendar days after a Special Meeting Request
3
��������
that satisfies the requirements of this Section 1.4 (or, in the case of multiple Special Meeting requests, the last Special Meeting Request necessary to reach the Requisite Percentage) is received by the Secretary.
1.5.����Notice of Meetings of Shareholders. Except as otherwise expressly required or permitted by applicable law, not less than ten days nor more than sixty days before the date of every shareholders meeting the Secretary shall give to each shareholder of record entitled to vote at such meeting written notice stating the place, day and time of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called and indication that notice is being issued by or at the direction of the person or persons calling the meeting. Except as provided in Section 1.6(d) or as otherwise expressly required by applicable law, notice of any adjourned meeting of shareholders need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken. Any notice, if mailed, shall be deemed to be given when deposited in the United States mail, postage prepaid, addressed to the shareholder at the address for notices to such shareholder as it appears on the records of the Corporation.
1.6.����Quorum of Shareholders. (a) Unless otherwise expressly required by applicable law, at any meeting of the shareholders, the presence in person or by proxy of shareholders entitled to cast a majority of votes thereat shall constitute a quorum. Shares of the Corporations stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in an election of the directors of such other corporation is held by the Corporation, shall neither be counted for the purpose of determining the presence of a quorum nor entitled to vote at any meeting of the shareholders.
(b)����At any meeting of the shareholders at which a quorum shall be present, a majority of those present in person or by proxy may adjourn the meeting from time to time without notice other than announcement at the meeting. In the absence of a quorum, the officer presiding thereat shall have power to adjourn the meeting from time to time until a quorum shall be present. Notice of any adjourned meeting other than announcement at the meeting shall not be required to be given, except as provided in Section 1.6(d) below and except where expressly required by applicable law.
(c)����At any adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting originally called, but only those shareholders entitled to vote at the meeting as originally noticed shall be entitled to vote at any adjournment or adjournments thereof unless a new record date is fixed by the Board.
(d)����If a new date, time and place of an adjourned meeting is not announced at the original meeting before adjournment, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given in the manner specified in Section 1.5 to each shareholder of record entitled to vote at the meeting.
1.7.����Chairman and Secretary of Meeting. The Chairman or, in his or her absence, another officer of the Corporation designated by the Chairman, shall preside at meetings of the shareholders. The Secretary shall act as secretary of the meeting, or in the absence of the Secretary, an Assistant Secretary shall so act, or if neither is present, then the presiding officer may appoint a person to act as secretary of the meeting.
1.8.����Voting by Shareholders. (a) Except as otherwise expressly required by applicable law, at every meeting of the shareholders each shareholder shall be entitled to the number of votes specified in the Articles of Incorporation, in person or by proxy, for each share of stock standing in his or her name on the books of the Corporation on the date fixed pursuant to the provisions of Section 5.6 of these By-laws as the record date for the determination of the shareholders who shall be entitled to receive notice of and to vote at such meeting.
(b)����When a quorum is present at any meeting of the shareholders, action on a matter (other than the election of directors) by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless express provision of law or the Articles of Incorporation require a greater number of affirmative votes.
4
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(c)����Except as required by applicable law, the vote at any meeting of shareholders on any question need not be by ballot, unless so directed by the chairman of the meeting. On a vote by ballot, each ballot shall be signed by the shareholder voting, or by his or her proxy, if there be such proxy, and shall state the number of shares voted.
1.9.����Proxies. Any shareholder entitled to vote at any meeting of shareholders may vote either in person or by proxy. A shareholder may authorize a person or persons to act for the shareholder as proxy by (i) the shareholder or the shareholders designated officer, director, employee or agent executing a writing by signing it or by causing the shareholders signature or the signature of the designated officer, director, employee or agent of the shareholder to be affixed to the writing by any reasonable means, including by facsimile signature; (ii) the shareholder transmitting or authorizing the transmission of an electronic submission which may be by any electronic means, including data and voice telephonic communications and computer network to (a) the person who will be the holder of the proxy; (b) a proxy solicitation firm; or (c) a proxy support service organization or similar agency authorized by the person who will be the holder of the proxy to receive the electronic submission, which electronic submission must either contain or be accompanied by information from which it can be determined that the electronic submission was transmitted by or authorized by the shareholder; or (iii) any other method allowed by law.
1.10.����Inspector. (a) The election of Directors and any other vote by ballot at any meeting of the shareholders shall be supervised by an inspector of election. Such inspector may be appointed by the Chairman before or at the meeting. If the Chairman shall not have so appointed such inspector or if the inspector so appointed shall refuse to serve or shall not be present, such appointment shall be made by the officer presiding at the meeting. The inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability.
(b)����The inspector shall (i) ascertain the number of shares of the Corporation outstanding and the voting power of each, (ii) determine the shares represented at any meeting of shareholders and the validity of the proxies and ballots, (iii) count all proxies and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspector, and (v) certify his or her determination of the number of shares represented at the meeting, and his or her count of all proxies and ballots. The inspector may appoint or retain other persons or entities to assist the inspector in the performance of his or her duties.
1.11.����List of Shareholders. (a) At least five business days before every meeting of shareholders, the Corporation shall cause to be prepared and made a complete list of the shareholders entitled to vote at the meeting, arranged in alphabetical order by voting group, if any, and showing the address of each shareholder and the number of shares registered in the name of each shareholder.
(b)����During ordinary business hours for a period of at least five business days prior to the meeting, such list shall be open to examination by any shareholder for any purpose germane to the meeting, either at the Corporations principal office or a place identified in the meeting notice in the city where the meeting will be held.
(c)����The list shall also be produced and kept at the time and place of the meeting, and it may be inspected during the meeting by any shareholder or the shareholders agent or attorney authorized in writing.
(d)����The stock ledger shall be the only evidence as to who are the shareholders entitled to examine the stock ledger, the list required by this Section 1.11 or the books of the Corporation, or to vote in person or by proxy at any meeting of shareholders.
1.12.����Confidential Voting. (a) Proxies and ballots that identify the votes of specific shareholders shall be kept in confidence by the tabulators and the inspector of election unless (i) there is an opposing solicitation with respect to the election or removal of Directors, (ii) disclosure is required by applicable law, (iii) a shareholder expressly requests or otherwise authorizes disclosure, or (iv) the Corporation concludes in good faith that a bona fide dispute exists as to the authenticity of one or more proxies, ballots or votes, or as to the accuracy of any tabulation of such proxies, ballots or votes.
5
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(b)����The tabulators and inspector of election and any authorized agents or other persons engaged in the receipt, count and tabulation of proxies and ballots shall be advised of this By-law and instructed to comply herewith.
(c)����The inspector of election shall certify, to the best of their knowledge based on due inquiry, that proxies and ballots have been kept in confidence as required by this Section 1.12.
2. | DIRECTORS. |
2.1.����Powers of Directors. The business and affairs of the Corporation shall be managed by or under the direction of the Board, which may exercise all the powers of the Corporation except such as are by applicable law, the Articles of Incorporation or these By-laws required to be exercised or performed by the shareholders.
2.2.����Number, Method of Election, Terms of Office of Directors. The number of Directors which shall constitute the whole Board shall be such as set forth in, and as determined in accordance with, the Articles of Incorporation. Prior to the annual meeting of shareholders to be held in 2015 (the 2015 Annual Meeting ), the directors shall be divided into three classes as nearly equal in number as possible as provided in the Articles of Incorporation. All Directors elected at or after the 2015 Annual Meeting shall be elected for a term expiring at the next annual meeting of shareholders, with each such Director to hold office until such Directors successor shall have been elected and qualified, or until his or her earlier death, retirement, resignation or removal. Notwithstanding the foregoing, any Director whose term expires at the annual meeting of stockholders scheduled to be held in 2016 or 2017 shall continue to hold office until the end of the term for which such Director was elected and until such Directors successor shall have been elected and qualified, or until his or her earlier death, retirement, resignation or removal. Directors need not be shareholders of the Corporation or citizens of the United States of America.
Nominations of persons for election as Directors may be made by the Board or by any shareholder who is a shareholder of record at the time of giving of the notice of nomination provided for in this Section 2.2 and who is entitled to vote for the election of Directors. Any shareholder of record entitled to vote for the election of Directors at a meeting may nominate a person or persons for election as Directors only if written notice of such shareholders intent to make such nomination is given in accordance with the procedures for bringing business before the meeting set forth in Section 1.3(b) of these By-Laws, either by personal delivery or by United States mail, postage prepaid, to the Secretary, received at the principal executive offices of the Corporation, not later than (i) with respect to an election to be held at an annual meeting of shareholders, not less than 90 calendar days nor more than 120 calendar days prior to the date of the Corporations proxy statement released to shareholders in connection with the previous years annual meeting; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting was changed by more than 30 days from the anniversary date of the previous years annual meeting, notice by the shareholder must be so received not earlier than 120 calendar days prior to such annual meeting and not later than 90 calendar days prior to such annual meeting or 10 calendar days following the date on which public announcement of the date of the meeting is first made, and (ii) with respect to an election to be held at a special meeting of shareholders for the election of Directors, not earlier than 120 calendar days prior to such special meeting and not later than 90 calendar days prior to such special meeting or 10 calendar days following the date on which public announcement of the date of the special meeting is first made and of the nominees to be elected at such meeting. In no event shall the public announcement of an adjournment or postponement of a meeting commence a new time period, or extend any time period, for the giving of written notice. Any such notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination and the beneficial owner, if any, on whose behalf the nomination is made and of the person or persons to be nominated; (b) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the shareholder, any beneficial owner on whose behalf the nomination is made and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (d) such other information regarding each shareholder, the beneficial owner, if any, on whose behalf the nomination is made and nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the
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proxy rules of the Securities and Exchange Commission in connection with solicitations of proxies for the election of directors in an election contest; (e) the consent of each nominee to serve as a Director if so elected; (f) if the shareholder or beneficial owner, if any, intends to (x) deliver a proxy statement and/or form of proxy to the holders of at least the percent of the Corporations outstanding capital stock required to elect the nominee and/or (y) otherwise solicit proxies of votes from shareholders in support of such shareholders nominee(s), a representation to that effect; (g) a description of any agreement, arrangement or understanding with respect to the nomination and/or the voting of shares of any class or series of stock of the Corporation between or among the Proponent Persons; and (viii) a description of any agreement, arrangement or understanding (including without limitation any swap or other derivative or short position, profits interest, hedging transaction, borrowed or loaned shares, any contract to purchase or sell, acquisition or grant of any option, right or warrant to purchase or sell or other instrument) to which any Proponent Person is a party, the intent or effect of which may be (x) to transfer to or from any Proponent Person, in whole or in part, any of the economic consequences of ownership of any security of the Corporation, (y) to increase or decrease the voting power of any Proponent Person with respect to shares of any class or series of capital stock of the Corporation and/or (z) to provide any Proponent Person, directly or indirectly, with the opportunity to profit or share in any profit derived from, or to otherwise benefit economically from, or to mitigate any loss resulting from, the value (or any increase or decrease in the value) of any security of the Corporation. A shareholder providing notice of a proposed nomination (whether given pursuant to Section 2.2 or Section 1.4 of these By-Laws) shall update and supplement such notice from time to time to the extent necessary so that the information provided or required to be provided in such notice shall be true and correct as of the record date for the meeting and as of the date that is fifteen calendar days prior to the meeting or any adjournment or postponement thereof; such update and supplement shall be delivered in writing to the Secretary of the Corporation at the principal executive offices of the Corporation not later than five calendar days after the record date for the meeting (in the case of any update and supplement required to be made as of the record date), and not later than ten calendar days prior to the date for the meeting or any adjournment or postponement thereof (in the case of any update and supplement required to be made as of fifteen calendar days prior to the meeting or any adjournment or postponement thereof).The chairman of any meeting of shareholders to elect Directors and the Board may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedures or if the shareholder solicits proxies in support of such shareholders nominee(s) without such shareholder having made the representation required by (f) of the preceding sentence. The Corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the Corporation.
In an uncontested election (i.e. any election in which the number of nominees does not exceed the number of Directors to be elected), Directors shall be elected by a majority of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. Any Director nominee that does not receive the requisite votes shall not be elected. Any Director nominee who fails to be elected but who is a Director at the time of the election shall promptly provide a written resignation to the Chairman or the Secretary and remain a Director until a successor shall have been elected and qualified (a Holdover Director ).
The Nominating and Governance Committee (or the equivalent committee then in existence) shall promptly consider the resignation and all relevant facts and circumstances concerning the vote and the best interests of the Corporation and its shareholders. After consideration, the Nominating and Governance Committee shall make a recommendation to the Board whether to accept or reject the tendered resignation, or whether other action should be taken.
The Board will act on the Nominating and Governance Committees recommendation no later than its next regularly scheduled Board Meeting or within 90 days after certification of the shareholder vote, whichever is earlier.
The Board will promptly publicly disclose its decision (by a press release, a filing with the Securities and Exchange Commission or other broadly disseminated means of communication) and the reasons for its decision.
Any Holdover Director who tenders a resignation shall not participate in the Nominating and Governance Committees recommendation or Board action regarding whether to accept the resignation offer. If a Holdover Directors resignation is not accepted, such Holdover Director shall continue to serve until his or her successor is duly elected and qualified or his or her earlier resignation or removal. If a Holdover Directors resignation is
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accepted, then the Board may fill the resulting vacancy, or decrease the size of the Board, pursuant to the provisions of Article Fifth of the Articles of Incorporation.
If each member of the Nominating and Governance Committee receives less than a majority of the votes cast at the same election, then the Board shall appoint a committee composed of three independent Directors (with an independent Director being a Director that has been determined by the Board to be independent under such criteria as it deems applicable, including, without limitation, applicable New York Stock Exchange rules and regulations and other applicable law) who received more than a majority of the votes cast to consider the resignation offers and recommend to the Board whether to accept the offers. However, if there are fewer than three independent Directors who receive a majority or more of the votes cast in the same election then the Board will promptly consider the resignation and all relevant facts and circumstances concerning the vote and the best interests of the Corporation and its shareholders and act no later than its next regularly scheduled Board Meeting or within 90 days after certification of the shareholder vote, whichever is earlier. If all Directors receive less than a majority of the votes cast at the same election, the election shall be treated as a contested election and the majority vote requirement shall be inapplicable.
2.3.����Vacancies on Board. (a) Any Director may resign from office at any time by delivering a written resignation to the Chairman or the Secretary. The resignation will take effect at the time specified therein, or, if no time is specified, at the time of its receipt by the Corporation. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation.
(b)����Any vacancy resulting from the death, retirement, resignation, or removal of a Director and any newly created Directorship resulting from any increase in the authorized number of Directors may be filled by vote of a majority of the Directors then in office, though less than a quorum. In the case of any vacancy so filled prior to the 2015 Annual Meeting, any Director so chosen shall hold office for the balance of the term of the class of the director he or she succeeds or, in the event of an increase in the number of Directors, of the class to which he or she is assigned and until a successor is duly elected and qualified, or until his or her earlier death, retirement, resignation or removal. In the case of any vacancy so filled at or after the 2015 Annual Meeting, any Director so chosen shall hold office for a term ending at the next annual meeting of shareholders and until such Directors successor shall have been elected and qualified, or until his or her earlier death, retirement, resignation or removal. If there are no Directors in office, then an election of Directors may be held in the manner provided by applicable law.
2.4.����Meetings of the Board. (a) The Board may hold its meetings, both regular and special, either within or outside the state of Indiana, at such places as from time to time may be determined by the Board or as may be designated in the respective notices or waivers of notice thereof.
(b)����Regular meetings of the Board shall be held at such times and at such places as from time to time shall be determined by the Board.
(c)����The first meeting of each newly elected Board shall be held as soon as practicable after the annual meeting of the shareholders and shall be for the election of officers and the transaction of such other business as may come before it.
(d)����Special meetings of the Board shall be held whenever called by direction of the Chairman or at the request of Directors constituting one-third of the number of Directors then in office.
(e)����Members of the Board or any Committee of the Board may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting.
(f)����The Secretary shall give notice to each Director of any meeting of the Board by mailing the same at least two days before the meeting or by telegraphing, or delivering the same not later than the day before the meeting. Such notice need not include a statement of the business to be transacted at, or the purpose of, any such meeting. Any and all business may be transacted at any meeting of the Board. No notice of any adjourned meeting
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need be given. No notice to or waiver by any Director shall be required with respect to any meeting at which the Director is present.
2.5.����Quorum and Action. Except as otherwise expressly required by applicable law, the Articles of Incorporation or these By-laws, at any meeting of the Board, the presence of at least one-third of the entire Board shall constitute a quorum for the transaction of business; but if there shall be less than a quorum at any meeting of the Board, a majority of those present may adjourn the meeting from time to time. Unless otherwise provided by applicable law, the Articles of Incorporation or these By-laws, the vote of a majority of the Directors present (and not abstaining) at any meeting at which a quorum is present shall be necessary for the approval and adoption of any resolution or the approval of any act of the Board.
2.6.����Presiding Officer and Secretary of Meeting. The Chairman or, in the absence of the Chairman, a member of the Board selected by the members present, shall preside at meetings of the Board. The Secretary shall act as secretary of the meeting, but in the Secretarys absence the presiding officer may appoint a secretary of the meeting.
2.7.����Action by Consent without Meeting. Any action required or permitted to be taken at any meeting of the Board or of any Committee thereof may be taken without a meeting if all members of the Board or Committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of their proceedings.
2.8.����Standing Committees. By resolution passed by a majority of the entire Board, the Board may also appoint from among its members such other Committees as it may from time to time deem desirable and may delegate to such Committees such powers of the Board as it may consider appropriate, consistent with applicable law, the Articles of Incorporation and these By-laws. Except to the extent inconsistent with the resolutions creating a Committee, Sections 2.4, 2.5, 2.7, 2.12 and 10 of these By-laws, which govern meetings, action without meetings, notice and waiver of notice, electronic actions, quorum and voting requirements and telephone participation in meetings of the Board, shall apply to each Committee (including any Standing Committee) and its members as well.
2.9.����Other Committees. By resolution passed by a majority of the entire Board, the Board may also appoint from among its members such other Committees as it may from time to time deem desirable and may delegate to such Committees such powers of the Board as it may consider appropriate, consistent with applicable law, the Articles of Incorporation and these By-laws. Except to the extent inconsistent with the resolutions creating a Committee, Sections 2.4, 2.5, 2.7, and 10 of these By-laws, which govern meetings, action without meetings, notice and waiver of notice, quorum and voting requirements and telephone participation in meetings of the Board, shall apply to each Committee (including any Standing Committee) and its members as well.
2.10.����Compensation of Directors. Unless otherwise restricted by the Articles of Incorporation or these By-laws, Directors shall receive for their services on the Board or any Committee thereof such compensation and benefits, including the granting of options, together with expenses, if any, as the Board may from time to time determine. The Directors may be paid a fixed sum for attendance at each meeting of the Board or Committee thereof and/or a stated annual sum as a Director, together with expenses, if any, of attendance at each meeting of the Board or Committee thereof. Nothing herein contained shall be construed to preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor.
2.11.����Mandatory Classified Board Structure. The provisions of IC 23-1-33-6(c) shall not apply to the Corporation.
3. | OFFICERS. |
3.1.����Officer, Titles, Elections, Terms. (a) The Board may from time to time elect a Chairman, a Chief Executive, a Vice Chairman, a President, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Corporate Vice Presidents, a Chief Financial Officer, a Chief Accounting Officer, a Controller, a Treasurer, a Secretary, a Chief Legal Officer, one or more Assistant Controllers, one or more Assistant
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Treasurers, one or more Assistant Secretaries, and one or more Deputy General Counsels, to serve at the pleasure of the Board or otherwise as shall be specified by the Board at the time of such election and until their successors are elected and qualified or until their earlier death, retirement, resignation or removal.
(b)����The Board may elect or appoint at any time such other officers or agents with such duties as it may deem necessary or desirable. Such other officers or agents shall serve at the pleasure of the Board or otherwise as shall be specified by the Board at the time of such election or appointment and, in the case of such other officers, until their successors are elected and qualified or until their earlier death, retirement, resignation or removal. Each such officer or agent shall have such authority and shall perform such duties as may be provided herein or as the Board may prescribe. The Board may from time to time authorize any officer or agent to appoint and remove any other such officer or agent and to prescribe such persons authority and duties.
(c)����No person may be elected or appointed an officer who is not a citizen of the United States of America if such election or appointment is prohibited by applicable law or regulation.
(d)����Any vacancy in any office may be filled for the unexpired portion of the term by the Board. Each officer elected or appointed during the year shall hold office until the next annual meeting of the Board at which officers are regularly elected or appointed and until his or her successor is elected or appointed and qualified or until his or her earlier death, retirement, resignation or removal.
(e)����Any officer or agent elected or appointed by the Board may be removed at any time by the affirmative vote of a majority of the entire Board.
(f)����Any officer may resign from office at any time. Such resignation shall be made in writing and given to the President or the Secretary. Any such resignation shall take effect at the time specified therein, or, if no time is specified, at the time of its receipt by the Corporation. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation.
3.2.����General Powers of Officers. Except as may be otherwise provided by applicable law or in Article 6 or Article 7 of these By-laws, the Chairman, any Vice Chairman, the President, any Executive Vice President, any Senior Vice President, any Corporate Vice President, the Chief Financial Officer, the Chief Legal Officer, the Chief Accounting Officer, the Controller, the Treasurer and the Secretary, or any of them, may (i) execute and deliver in the name of the Corporation, in the name of any Division of the Corporation or in both names any agreement, contract, instrument, power of attorney or other document pertaining to the business or affairs of the Corporation or any Division of the Corporation, including without limitation agreements or contracts with any government or governmental department, agency or instrumentality, and (ii) delegate to any employee or agent the power to execute and deliver any such agreement, contract, instrument, power of attorney or other document.
3.3.����Powers of the Chairman or Chief Executive. The Chairman shall be the Chief Executive (as defined in Section 3.11) of the Corporation unless the Board specifically elects the President to be Chief Executive of the Corporation, in which case the President shall be the Chief Executive. If either the Chairman or the President is the Chief Executive, then he or she shall report directly to the Board. Except in such instances as the Board may confer powers in particular transactions upon any other officer, and subject to the control and direction of the Board, the Chief Executive shall manage and direct the business and affairs of the Corporation and shall communicate to the Board and any Committee thereof reports, proposals and recommendations for their respective consideration or action. He or she may do and perform all acts on behalf of the Corporation. The Chairman (whether or not the Chief Executive) shall preside at meetings of the Board and the shareholders.
3.4.����Powers and Duties of a Vice Chairman. A Vice Chairman shall have such powers and perform such duties as the Board or the Chairman may from time to time prescribe or as may be prescribed in these By-laws.
3.5.����Powers and Duties of the President. Unless the President is Chief Executive, the President shall have such powers and perform such duties as the Board or the Chairman may from time to time prescribe or as may be prescribed in these By-laws. If the President is the Chief Executive, then Section 3.3 shall be applicable.
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3.6.����Powers and Duties of Executive Vice Presidents, Senior Vice Presidents and Corporate Vice Presidents. Executive Vice Presidents, Senior Vice Presidents and Corporate Vice Presidents shall have such powers and perform such duties as the Board, the Chairman, or the Chief Executive may from time to time prescribe or as may be prescribed in these By-laws.
3.7.����Powers and Duties of the Chief Financial Officer. The Chief Financial Officer shall have such powers and perform such duties as the Board, the Chairman, Chief Executive, or any Vice Chairman may from time to time prescribe or as may be prescribed in these By-laws. The Chief Financial Officer shall cause to be prepared and maintained (i) a stock ledger containing the names and addresses of all shareholders and the number of shares of each class and series held by each and (ii) the list of shareholders for each meeting of the shareholders as required by Section 1.11 of these By-laws. The Chief Financial Officer shall be responsible for the custody of all stock books and of all unissued stock certificates.
3.8.����Powers and Duties of the Chief Accounting Officer, Controller and Assistant Controllers. (a) The Chief Accounting Officer, Controller or the Corporate Vice President, Finance, as determined by the Chief Financial Officer, shall be responsible for the maintenance of adequate accounting records of all assets, liabilities, capital and transactions of the Corporation. The Chief Accounting Officer, Controller, or the Corporate Vice President, Finance as determined by the Chief Financial Officer, shall prepare and render such balance sheets, income statements, budgets and other financial statements and reports as the Board or the Chairman or the Chief Executive may require, and shall perform such other duties as may be prescribed or assigned pursuant to these By-laws and all other acts incident to the position of the Chief Accounting Officer, Controller, or the Corporate Vice President, Finance.
(b)����Each Assistant Controller shall perform such duties as from time to time may be assigned by the Controller or by the Board. In the event of the absence, incapacity or inability to act of the Controller, then any Assistant Controller may perform any of the duties and may exercise any of the powers of the Controller.
3.9.����Powers and Duties of the Treasurer and Assistant Treasurers. (a) The Treasurer shall have the care and custody of all the funds and securities of the Corporation except as may be otherwise ordered by the Board, and shall cause such funds (i) to be invested or reinvested from time to time for the benefit of the Corporation as may be designated by the Board, the Chairman, any Vice Chairman, the President, the Chief Financial Officer or the Treasurer or (ii) to be deposited to the credit of the Corporation in such banks or depositories as may be designated by the Board, the Chairman, any Vice Chairman, the President, the Chief Financial Officer or the Treasurer, and shall cause such securities to be placed in safekeeping in such manner as may be designated by the Board, the Chairman, any Vice Chairman, the President, the Chief Financial Officer or the Treasurer.
(b)����The Treasurer, any Assistant Treasurer or such other person or persons as may be designated for such purpose by the Board, the Chairman, any Vice Chairman, the President, the Chief Financial Officer or the Treasurer may endorse in the name and on behalf of the Corporation all instruments for the payment of money, bills of lading, warehouse receipts, insurance policies and other commercial documents requiring such endorsement.
(c)����The Treasurer, any Assistant Treasurer or such other person or persons as may be designated for such purpose by the Board, the Chairman, any Vice Chairman, the President, the Chief Financial Officer or the Treasurer (i) may sign all receipts and vouchers for payments made to the Corporation, (ii) shall render a statement of the cash account of the Corporation to the Board as often as it shall require the same; and (iii) shall enter regularly in books to be kept for that purpose full and accurate account of all moneys received and paid on account of the Corporation and of all securities received and delivered by the Corporation.
(d)����The Treasurer shall perform such other duties as may be prescribed or assigned pursuant to these By-laws and all other acts incident to the position of Treasurer. Each Assistant Treasurer shall perform such duties as may from time to time be assigned by the Treasurer or by the Board. In the event of the absence, incapacity or inability to act of the Treasurer, then any Assistant Treasurer may perform any of the duties and may exercise any of the powers of the Treasurer.
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3.10.����Powers and Duties of the Secretary and Assistant Secretaries. (a) The Secretary shall keep the minutes of all proceedings of the shareholders, the Board and the Committees of the Board. The Secretary shall attend to the giving and serving of all notices of the Corporation, in accordance with the provisions of these By-laws and as required by applicable law. The Secretary shall be the custodian of the seal of the Corporation. The Secretary shall affix or cause to be affixed the seal of the Corporation to such contracts, instruments and other documents requiring the seal of the Corporation, and when so affixed may attest the same and shall perform such other duties as may be prescribed or assigned pursuant to these By-laws and all other acts incident to the position of Secretary.
(b)����Each Assistant Secretary shall perform such duties as may from time to time be assigned by the Secretary or by the Board. In the event of the absence, incapacity or inability to act of the Secretary, then any Assistant Secretary may perform any of the duties and may exercise any of the powers of the Secretary.
3.11.����Applicable Definition. As used in these By-laws, the term Chief Executive shall refer to the Chairman unless the President is elected to be the Chief Executive, pursuant to Section 3.3, in which case the term Chief Executive shall refer to the President.
4. | INDEMNIFICATION. |
4.1.(a)����Right to Indemnification. The Corporation, to the fullest extent permitted by applicable law as then in effect, shall indemnify any person who is or was a Director or officer of the Corporation and who is or was involved in any manner (including, without limitation, as a party or a witness) or is threatened to be made so involved in any threatened, pending or completed investigation, claim, action, suit or proceeding, whether civil, criminal, administrative or investigative (including, without limitation, any action, suit or proceeding by or in the right of the Corporation to procure a judgment in its favor) (a Proceeding ) by reason of the fact that such person is or was a Director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee, fiduciary or agent of another corporation, partnership, joint venture, trust or other enterprise (including, without limitation, any employee benefit plan) (a Covered Entity ), against all expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such Proceeding; provided, however, that the foregoing shall not apply to a Director or officer of the Corporation with respect to a Proceeding that was commenced by such Director or officer prior to a Change in Control (as defined in Section 4.4(e)(i) of this Article 4). Any Director or officer of the Corporation entitled to indemnification as provided in this Section 4.1(a) is hereinafter called an Indemnitee . Any right of an Indemnitee to indemnification shall be a contract right and shall include the right to receive, prior to the conclusion of any Proceeding, payment of any expenses incurred by the Indemnitee in connection with such Proceeding, consistent with the provisions of applicable law as then in effect and the other provisions of this Article 4.
(b)����Effect of Amendments. Neither the amendment or repeal of, nor the adoption of a provision inconsistent with, any provision of this Article 4 (including, without limitation, this Section 4.1(b)) shall adversely affect the rights of any Director or officer under this Article 4 (i) with respect to any Proceeding commenced or threatened prior to such amendment, repeal or adoption of an inconsistent provision or (ii) after the occurrence of a Change in Control, with respect to any Proceeding arising out of any action or omission occurring prior to such amendment, repeal or adoption of an inconsistent provision, in either case without the written consent of such Director or officer.
4.2.����Insurance, Contracts and Funding. The Corporation may purchase and maintain insurance to protect itself and any indemnified person against any expenses, judgments, fines and amounts paid in settlement as specified in Section 4.1(a) or Section 4.5 of this Article 4 or incurred by any indemnified person in connection with any Proceeding referred to in such Sections, to the fullest extent permitted by applicable law as then in effect. The Corporation may enter into contracts with any Director, officer, employee or agent of the Corporation or any director, officer, employee, fiduciary or agent of any Covered Entity in furtherance of the provisions of this Article 4 and may create a trust fund or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this Article 4.
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4.3.����Indemnification; Not Exclusive Right. The right of indemnification provided in this Article 4 shall not be exclusive of any other rights to which any indemnified person may otherwise be entitled, and the provisions of this Article 4 shall inure to the benefit of the heirs and legal representatives of any indemnified person under this Article 4 and shall be applicable to Proceedings commenced or continuing after the adoption of this Article 4, whether arising from acts or omissions occurring before or after such adoption.
4.4.����Advancement of Expenses; Procedures; Presumptions and Effect of Certain Proceedings; Remedies. In furtherance, but not in limitation, of the foregoing provisions, the following procedures, presumptions and remedies shall apply with respect to the advancement of expenses and the right to indemnification under this Article 4:
(a)����Advancement of Expenses. All reasonable expenses incurred by or on behalf of the Indemnitee in connection with any Proceeding shall be advanced to the Indemnitee by the Corporation within 20 days after the receipt by the Corporation of a statement or statements from the Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Any such statement or statements shall reasonably evidence the expenses incurred by the Indemnitee and shall include any written affirmation or undertaking required by applicable law in effect at the time of such advance.
(b)����Procedures for Determination of Entitlement to Indemnification. (i) To obtain indemnification under this Article 4, an Indemnitee shall submit to the Secretary of the Corporation a written request, including such documentation and information as is reasonably available to the Indemnitee and reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification (the Supporting Documentation ). The determination of the Indemnitees entitlement to indemnification shall be made not later than 60 days after receipt by the Corporation of the written request for indemnification together with the Supporting Documentation. The Secretary of the Corporation shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that the Indemnitee has requested indemnification.
(ii)����The Indemnitees entitlement to indemnification under this Article 4 shall be determined in one of the following ways: (A) by a majority vote of the Disinterested Directors (as hereinafter defined), if they constitute a quorum of the Board; (B) by a written opinion of Independent Counsel (as hereinafter defined) if (x) a Change in Control (as hereinafter defined) shall have occurred and the Indemnitee so requests or (y) a quorum of the Board consisting of Disinterested Directors is not obtainable or, even if obtainable, a majority of such Disinterested Directors so directs; (C) by the shareholders of the Corporation (but only if a majority of the Disinterested Directors, if they constitute a quorum of the Board, presents the issue of entitlement to indemnification to the shareholders for their determination); or (D) as provided in Section 4.4(c) of this Article 4.
(iii)����In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 4.4(b)(ii), a majority of the Disinterested Directors shall select the Independent Counsel, but only an Independent Counsel to which the Indemnitee does not reasonably object; provided, however, that if a Change in Control shall have occurred, the Indemnitee shall select such Independent Counsel, but only an Independent Counsel to which a majority of the Disinterested Directors does not reasonably object.
(c)����Presumptions and Effect of Certain Proceedings. Except as otherwise expressly provided in this Article 4, if a Change in Control shall have occurred, the Indemnitee shall be presumed to be entitled to indemnification under this Article 4 (with respect to actions or failures to act occurring prior to such Change in Control) upon submission of a request for indemnification together with the Supporting Documentation in accordance with Section 4.4(b) of this Article 4, and thereafter the Corporation shall have the burden of proof to overcome that presumption in reaching a contrary determination. In any event, if the person or persons empowered under Section 4.4(b) of this Article 4 to determine entitlement to indemnification shall not have been appointed or shall not have made a determination within 60 days after receipt by the Corporation of the request therefor together with the Supporting Documentation, the Indemnitee shall be deemed to be, and shall be, entitled to indemnification unless (A) the Indemnitee misrepresented or failed to disclose a material fact in making the request for
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indemnification or in the Supporting Documentation or (B) such indemnification is prohibited by law. The termination of any Proceeding described in Section 4.1 of this Article 4, or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, adversely affect the right of the Indemnitee to indemnification or create a presumption that the Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation or, with respect to any criminal Proceeding, that the Indemnitee had reasonable cause to believe that his or her conduct was unlawful.
(d)����Remedies of Indemnitee. (i) In the event that a determination is made pursuant to Section 4.4(b) of this Article 4 that the Indemnitee is not entitled to indemnification under this Article 4, (A) the Indemnitee shall be entitled to seek an adjudication of his or her entitlement to such indemnification either, at the Indemnitees sole option, in (x) an appropriate court of the state of Indiana or any other court of competent jurisdiction or (y) an arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association; (B) any such judicial proceeding or arbitration shall be de novo and the Indemnitee shall not be prejudiced by reason of such adverse determination; and (C) if a Change in Control shall have occurred, in any such judicial proceeding or arbitration the Corporation shall have the burden of proving that the Indemnitee is not entitled to indemnification under this Article 4 (with respect to actions or failures to act occurring prior to such Change in Control).
(ii)����If a determination shall have been made or deemed to have been made, pursuant to Section 4.4(b) or (c) of this Article 4, that the Indemnitee is entitled to indemnification, the Corporation shall be obligated to pay the amounts constituting such indemnification within five days after such determination has been made or deemed to have been made and shall be conclusively bound by such determination unless (A) the Indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (B) such indemnification is prohibited by law. In the event that (x) advancement of expenses is not timely made pursuant to Section 4.4(a) of this Article 4 or (y) payment of indemnification is not made within five days after a determination of entitlement to indemnification has been made or deemed to have been made pursuant to Section 4.4(b) or (c) of this Article 4, the Indemnitee shall be entitled to seek judicial enforcement of the Corporations obligation to pay to the Indemnitee such advancement of expenses or indemnification. Notwithstanding the foregoing, the Corporation may bring an action, in an appropriate court in the state of Indiana or any other court of competent jurisdiction, contesting the right of the Indemnitee to receive indemnification hereunder due to the occurrence of an event described in Subclause (A) or (B) of this Clause (ii) (a Disqualifying Event ); provided, however, that in any such action the Corporation shall have the burden of proving the occurrence of such Disqualifying Event.
(iii)����The Corporation shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 4.4(d) that the procedures and presumptions of this Article 4 are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Corporation is bound by all the provisions of this Article 4.
(iv)����In the event that the Indemnitee, pursuant to this Section 4.4(d), seeks a judicial adjudication of or an award in arbitration to enforce his or her rights under, or to recover damages for breach of, this Article 4, the Indemnitee shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any expenses actually and reasonably incurred by the Indemnitee if the Indemnitee prevails in such judicial adjudication or arbitration. If it shall be determined in such judicial adjudication or arbitration that the Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by the Indemnitee in connection with such judicial adjudication or arbitration shall be prorated accordingly.
(e)����Definitions. For purposes of this Article 4:
(i)���� Change in Control means a change in control of the Corporation of a nature that would be required to be reported in response to Item 6(e) (or any successor provision) of Schedule 14A of Regulation 14A (or any amendment or successor provision thereto) promulgated under the Securities
14
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Exchange Act of 1934 (the Act ), whether or not the Corporation is then subject to such reporting requirement; provided that, without limitation, such a change in control shall be deemed to have occurred if (A) any person (as such term is used in Sections 13(d) and 14(d) of the Act) is or becomes the beneficial owner (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Corporation representing 20% or more of the voting power of all outstanding shares of stock of the Corporation entitled to vote generally in an election of Directors without the prior approval of at least two-thirds of the members of the Board in office immediately prior to such acquisition; (B) the Corporation is a party to any merger or consolidation in which the Corporation is not the continuing or surviving corporation or pursuant to which shares of the Corporations common stock would be converted into cash, securities or other property, other than a merger of the Corporation in which the holders of the Corporations common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, (C) there is a sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Corporation, or liquidation or dissolution of the Corporation; (D) the Corporation is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board in office immediately prior to such transaction or event constitute less than a majority of the Board thereafter; or (E) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board (including for this purpose any new Director whose election or nomination for election by the shareholders was approved by a vote of at least two-thirds of the Directors then still in office who were Directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board.
(ii)���� Disinterested Director means a Director who is not or was not a party to the proceeding in respect of which indemnification is sought by the Indemnitee.
(iii)���� Independent Counsel means a law firm or a member of a law firm that neither presently is, nor in the past five years has been, retained to represent: (a) the Corporation or the Indemnitee in any matter material to either such party or (b) any other party to the Proceeding giving rise to a claim for indemnification under this Article 4. Notwithstanding the foregoing, the term Independent Counsel shall not include any person who, under applicable standards of professional conduct, would have a conflict of interest in representing either the Corporation or the Indemnitee in an action to determine the Indemnitees rights under this Article 4.
4.5.����Indemnification of Employees and Agents. Notwithstanding any other provision of this Article 4, the Corporation, to the fullest extent permitted by applicable law as then in effect, may indemnify any person other than a Director or officer of the Corporation who is or was an employee or agent of the Corporation and who is or was involved in any manner (including, without limitation, as a party or a witness) or is threatened to be made so involved in any threatened, pending or completed Proceeding by reasons of the fact that such person is or was an employee or agent of the Corporation or, at the request of the Corporation, a director, officer, employee, fiduciary or agent of a Covered Entity against all expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such Proceeding. The Corporation may also advance expenses incurred by such employee, fiduciary or agent in connection with any such Proceeding, consistent with the provisions of applicable law as then in effect.
4.6.����Severability. If any of this Article 4 shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (i) the validity, legality and enforceability of the remaining provisions of this Article 4 (including, without limitation, all portions of any Section of this Article 4 containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (ii) to the fullest extent possible, the provisions of this Article 4 (including, without limitation, all portions of any Section of this Article 4 containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.
5. | CAPITAL STOCK. |
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5.1.����Stock Certificates. (a) Shares of stock of each class of the Corporation may be issued in book-entry form or evidenced by certificates. Every certificate shall state on its face (or in the case of book-entry shares, the statement evidencing ownership of such shares shall state) the name of the Corporation and that it is organized under the laws of the State of Indiana, the name of the person to whom the certificate (or bookentry statement) was issued, and the number and class of shares and the designation of the series, if any, the certificate (or book-entry statement) represents, and shall state conspicuously on its front or back that the Corporation will furnish the shareholder, upon his written request and without charge, a summary of the designations, relative rights, preferences, and limitations applicable to each class and the variations in rights, preferences, and limitations determined for each series (and the authority of the Board of Directors to determine variations for future series), which certificate, if any, shall otherwise be in such form as the Board shall prescribe and as provided in Section 5.1(d).
(b)����If a certificate is countersigned by a transfer agent other than the Corporation or its employee, or by a registrar other than the Corporation or its employee, the signatures of the officers of the Corporation may be facsimiles, and, if permitted by applicable law, any other signature on the certificate may be a facsimile.
(c)����In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer at the date of issue.
(d)����Any certificates of stock shall be issued in such form not inconsistent with the Articles of Incorporation. They shall be numbered and registered in the order in which they are issued. No certificate shall be issued until fully paid.
(e)����All certificates surrendered to the Corporation shall be cancelled (other than treasury shares) with the date of cancellation and shall be retained by or under the control of the Chief Financial Officer, together with the powers of attorney to transfer and the assignments of the shares represented by such certificates, for such period of time as such officer shall designate.
5.2.����Record Ownership. A record of the name of the person, firm or corporation and address of each holder of stock, the number of shares of each class and series represented thereby and the date of issue thereof shall be made on the Corporations books. The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to or interest in any share on the part of any person, whether or not it shall have express or other notice thereof, except as required by applicable law.
5.3.����Transfer of Record Ownership. Transfers of stock shall be made on the books of the Corporation only by direction of the person named in the certificate (or book-entry statement) or such persons attorney, lawfully constituted in writing, and only upon the surrender of the certificate, if any, therefor and a written assignment of the shares evidenced thereby. Whenever any transfer of stock shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer if, when the certificates, if any, are presented to the Corporation for transfer, both the transferor and transferee request the Corporation to do so.
5.4.����Lost, Stolen or Destroyed Certificates. New certificates or uncertificated shares representing shares of the stock of the Corporation shall be issued in place of any certificate alleged to have been lost, stolen or destroyed in such manner and on such terms and conditions as the Board from time to time may authorize in accordance with applicable law.
5.5.����Transfer Agent; Registrar; Rules Respecting Certificates. The Corporation shall maintain one or more transfer offices or agencies where stock of the Corporation shall be transferable. The Corporation shall also maintain one or more registry offices where such stock shall be registered. The Board may make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of stock certificates (or book-entry statements) in accordance with applicable law.
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5.6.����Fixing Record Date for Determination of Shareholders of Record. (a) The Board may fix, in advance, a date as the record date for the purpose of determining the shareholders entitled to notice of, or to vote at, any meeting of the shareholders or any adjournment thereof, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which record date shall not be more than sixty days nor less than ten days before the date of a meeting of the shareholders. If no record date is fixed by the Board, the record date for determining the shareholders entitled to notice of or to vote at a shareholders meeting shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting and shall fix a new record date if such adjourned meeting is more than 120 days after the date of the original meeting. (b) The Board may fix, in advance, a date as the record date for the purpose of determining the shareholders entitled to receive payment of any dividend or other distribution or the allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or in order to make a determination of the shareholders for the purpose of any other lawful action, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which record date shall not be more than sixty days prior to such action. If no record date is fixed by the Board, the record date for determining the shareholders for any such purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto.
6. | SECURITIES HELD BY THE CORPORATION. |
6.1.����Voting. Unless the Board shall otherwise order, the Chairman, any Vice Chairman, the President, any Executive Vice President, any Senior Vice President, any Corporate Vice President, the Chief Financial Officer, the Chief Accounting Officer, the Controller, the Treasurer or the Secretary shall have full power and authority, on behalf of the Corporation, (i) to attend, act and vote at any meeting of the shareholders of any corporation in which the Corporation may hold stock and at such meeting to exercise any or all rights and powers incident to the ownership of such stock, and to execute on behalf of the Corporation a proxy or proxies empowering another or others to act as aforesaid, and (ii) to delegate to any employee or agent such power and authority.
6.2.����General Authorization to Transfer Securities Held by the Corporation. (a) Any of the following officers, to wit: the Chairman, any Vice Chairman, the President, any Executive Vice President, any Senior Vice President, any Corporate Vice President, the Chief Financial Officer, the Chief Accounting Officer, the Controller, the Treasurer, any Assistant Controller, any Assistant Treasurer, and each of them, hereby is authorized and empowered (i) to transfer, convert, endorse, sell, assign, set over and deliver any and all shares of stock, bonds, debentures, notes, subscription warrants, stock purchase warrants, evidences of indebtedness, or other securities now or hereafter standing in the name of or owned by the Corporation and to make, execute and deliver any and all written instruments of assignment and transfer necessary or proper to effectuate the authority hereby conferred, and (ii) to delegate to any employee or agent such power and authority.
(b)����Whenever there shall be annexed to any instrument of assignment and transfer executed pursuant to and in accordance with the foregoing Section 6.2(a), a certificate of the Secretary or any Assistant Secretary in office at the date of such certificate setting forth the provisions hereof, stating that they are in full force and effect, setting forth the names of persons who are then officers of the corporation, and certifying as to the employees or agents, if any, to whom any such power and authority have been delegated, all persons to whom such instrument and annexed certificate shall thereafter come shall be entitled, without further inquiry or investigation and regardless of the date of such certificate, to assume and to act in reliance upon the assumption that (i) the shares of stock or other securities named in such instrument were theretofore duly and properly transferred, endorsed, sold, assigned, set over and delivered by the Corporation, and (ii) with respect to such securities, the authority of these provisions of these Bylaws and of such officers, employees and agents is still in full force and effect.
7. | DEPOSITARIES AND SIGNATORIES. |
7.1.����Depositaries. The Chairman, any Vice Chairman, the President, the Chief Financial Officer, and the Treasurer are each authorized to designate depositaries for the funds of the Corporation deposited in its name or
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that of a Division of the Corporation, or both, and the signatories with respect thereto in each case, and from time to time, to change such depositaries and signatories, with the same force and effect as if each such depositary and the signatories with respect thereto and changes therein had been specifically designated or authorized by the Board; and each depositary designated by the Board or by the Chairman, any Vice Chairman, the President, the Chief Financial Officer, or the Treasurer shall be entitled to rely upon the certificate of the Secretary or any Assistant Secretary of the Corporation or of a Division of the Corporation setting forth the fact of such designation and of the appointment of the officers of the Corporation or of the Division or of both or of other persons who are to be signatories with respect to the withdrawal of funds deposited with such depositary, or from time to time the fact of any change in any depositary or in the signatories with respect thereto.
7.2.����Signatories. Unless otherwise designated by the Board or by the Chairman, any Vice Chairman, the President, the Chief Financial Officer or the Treasurer, each of whom is authorized to execute any of such items individually, all notes, drafts, checks, acceptances, orders for the payment of money and all other negotiable instruments obligating the Corporation for the payment of money, including any form of guaranty by the Corporation with respect to any such item entered into by any direct or indirect subsidiary of the Corporation, shall be (a) signed by any Assistant Treasurer and (b) countersigned by the Chief Accounting Officer, Controller or any Assistant Controller, or (c) either signed or countersigned by any Executive Vice President, any Senior Vice President or any Corporate Vice President in lieu of either the officers designated in Clause (a) or the officers designated in Clause (b) of this Section 7.2.
8. | SEAL. |
The seal of the Corporation shall be in such form and shall have such content as the Board shall from time to time determine.
9. | FISCAL YEAR. |
The fiscal year of the Corporation shall end on December 31 in each year, or on such other date as the Board shall determine.
10. | WAIVER OF OR DISPENSING WITH NOTICE. |
(a)����Whenever any notice of the time, place or purpose of any meeting of the shareholders is required to be given by applicable law, the Articles of Incorporation or these By-laws, a written waiver of notice, signed by a shareholder entitled to notice of a shareholders meeting, whether by pdf, facsimile, telegraph, cable or other form of recorded communication, whether signed before or after the time set for a given meeting, shall be deemed equivalent to notice of such meeting. The waiver must be included in the minutes or filed with the corporate records. Attendance of a shareholder in person or by proxy at a shareholders meeting shall constitute a waiver of notice to such shareholder of such meeting, except when (i) the shareholder attends the meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting was not lawfully called or convened, or (ii) the shareholder objects to consideration of a particular matter at the meeting at the time such matter is presented because it is not within the purpose or purposes described in the meeting notice.
(b)����Whenever any notice of the time or place of any meeting of the Board or Committee of the Board is required to be given by applicable law, the Articles of Incorporation or these By-laws, a written waiver of notice signed by a Director, whether by pdf, facsimile, telegraph, cable or other form of recorded communication, whether signed before or after the time set for a given meeting, shall be deemed equivalent to notice of such meeting. Unless the Director is deemed to have waived notice by attending the meeting, the waiver must be in writing, signed by the Director entitled to the notice and filed with the minutes or corporate records. Attendance of a Director at a meeting shall constitute a waiver of notice to such Director of such meeting, unless the Director at the beginning of the meeting (or promptly upon the Directors arrival) objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting.
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(c)����No notice need be given to any person with whom communication is made unlawful by any law of the United States or any rule, regulation, proclamation or executive order issued under any such law.
11. | POLITICAL NONPARTISANSHIP OF THE CORPORATION. |
The Corporation shall not make, directly or indirectly, any contributions or expenditures in connection with the election of any candidate for federal, state or local political office, or any committee campaigning for such a candidate, except to the extent necessary to permit in the United States the expenditure of corporate assets for the payment of expenses for establishing, registering and administering any political action committee and of soliciting contributions thereto, all as may be authorized by federal or state laws.
12. | AMENDMENT OF BY-LAWS. |
These By-laws, or any of them, may from time to time be supplemented, amended or repealed, or new By-laws may be adopted, by the Board at any regular or special meeting of the Board, if such supplement, amendment, repeal or adoption is approved by a majority of the entire Board.
13. | OFFICES AND AGENT. |
(a)����Registered Office and Agent. The registered office of the Corporation in the State of Indiana shall be 251 East Ohio Street, Suite 1100, Indianapolis, Indiana 46204. The name of the registered agent is The Corporation Trust Company.
(b)����Other Offices. The Corporation may also have offices at other places, either within or outside the State of Indiana, as the Board of Directors may from time to time determine or as the business of the Corporation may require.
14.����EXCLUSIVE FORUM FOR ADJUDICATION OF CERTAIN DISPUTES.
Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any action asserting a claim of breach of a fiduciary duty owed by any Director, officer, employee or agent of the Corporation to the Corporation, (ii) any action asserting a claim arising pursuant to any provision of the Indiana Business Corporation Law or the Corporations articles of incorporation or by-laws, or (iii) any action asserting a claim otherwise relating to the internal affairs of the Corporation including, but not limited to, any derivative action brought on behalf of the Corporation, shall be a Circuit or Superior Court of Marion County, Indiana or the United States District Court for the Southern District of Indiana, in all cases subject to the courts having personal jurisdiction over the indispensable parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of the Corporation shall be deemed to have notice of and consent to the provisions of this Section 14.
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EXHIBIT�12
EXELIS INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
�
Nine months ended September 30, | Year Ended December�31, � | ||||||||||||||||||
(IN MILLIONS, EXCEPT RATIO) | 2014 | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||
Earnings | |||||||||||||||||||
Income from continuing operations before income tax expense | $ | 266 | $ | 437 | $ | 521 | $ | 537 | $ | 696 | $ | 700 | |||||||
Add Fixed Charges | |||||||||||||||||||
Interest expense | 27 | 37 | 38 | 10 | 1 | ||||||||||||||
Interest component of rental expense�(a) | 12 | 16 | 16 | 15 | 14 | 14 | |||||||||||||
Total earnings available for fixed charges | $ | 305 | $ | 490 | $ | 575 | $ | 562 | $ | 710 | $ | 715 | |||||||
Total Fixed Charges | $ | 39 | $ | 53 | $ | 54 | $ | 25 | $ | 14 | $ | 15 | |||||||
Ratio of earnings to fixed charges | 7.8 | 9.2 | 10.6 | 22.5 | 50.7 | 47.7 | |||||||||||||
(a) | Represents the portion of operating leases which management believes is a reasonable representation of an interest factor. |
EXHIBIT 31.1
CERTIFICATION OF DAVID F. MELCHER PURSUANT TO SEC. 302
OF THE SARBANES-OXLEY ACT OF 2002
I, David F. Melcher, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September�30, 2014;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its combined subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
October�31, 2014 | /s/ DAVID F. MELCHER | |
(Date) | David F. Melcher | |
Chief Executive Officer and President | ||
EXHIBIT 31.2
CERTIFICATION OF PETER J. MILLIGAN PURSUANT TO SEC. 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Peter J. Milligan, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September�30, 2014;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its combined subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
October�31, 2014 | /s/ PETER J. MILLIGAN | |
(Date) | Peter J. Milligan | |
Senior Vice President | ||
and Chief Financial Officer | ||
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Exelis Inc. (the Company ) on Form 10-Q for the period ended September�30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the Report ), I, David F. Melcher, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
October�31, 2014 | /s/ DAVID F. MELCHER | |
(Date) | David F. Melcher | |
Chief Executive Officer and President | ||
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Exelis Inc. (the Company ) on Form 10-Q for the period ended September�30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the Report ), I, Peter J. Milligan, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
October�31, 2014 | /s/ PETER J. MILLIGAN | |
(Date) | Peter J. Milligan | |
Senior Vice President | ||
and Chief Financial Officer | ||
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
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