Key Performance Indicators and Non-GAAP Financial Measures

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

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

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

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

“Free cash flow” defined as GAAP cash flow from operating activities, less capital expenditures. This metric does not include dividend payments.

EXELIS INC.
Non-GAAP Financial Measures - Adjusted Net Income & Adjusted EPS
		Three Months Ended December 31,				Twelve Months Ended December 31,
($ million, except per share)		2012		2011		2012		2011
Net Income		86		64		330		326
Separation Costs, net of tax		4		14		19		29
Separation Related Tax Items		-		16		-		16
Adjusted Net Income		90		94		349		371
Net Income per fully diluted share		$0.45		$0.34		$1.75		$1.75
Adjusted Net Income per fully diluted share		$0.47		$0.50		$1.85		$1.99
Weighted Average Shares Outstanding, Diluted		189.5		186.7		188.6		186.7

EXELIS INC.
Non-GAAP Financial Measures - Adjusted Segment Operating Income & Operating Margin
		Three Months Ended December 31,				Twelve Months Ended December 31,
($ million)		2012		2011		2012		2011
Sales		1,361		1,480		5,522		5,839
C4ISR		603		709		2,487		2,817
I&TS		758		771		3,035		3,022
Segment Operating Income, As Reported		135		143		561		535
C4ISR		89		106		350		385
I&TS		46		37		211		150
Separation Costs		7		25		29		48
C4ISR		4		16		16		30
I&TS		3		9		13		18
Segment Operating Income, Adjusted		142		168		590		583
C4ISR		93		122		366		415
I&TS		49		46		224		168
Segment Operating Margin, As Reported
C4ISR		14.8%		15.0%		14.1%		13.7%
I&TS		6.1%		4.8%		7.0%		5.0%
Segment Operating Margin, Adjusted
C4ISR		15.4%		17.2%		14.7%		14.7%
I&TS		6.5%		6.0%		7.4%		5.6%
Operating Margin, As Reported		9.9%		9.7%		10.2%		9.2%
Operating Margin, Adjusted		10.4%		11.4%		10.7%		10.0%

EXELIS INC.
Non-GAAP Financial Measures - Quarterly Free Cash Flow
		Three Months Ended		Twelve Months Ending		Nine Months Ended
		December 31,		December 31,		September 30,
($ million)		2012		2012		2012
Cash Flow From Operating Activities		288		385		97
Subtract
Capital Expenditures		(33)		(119)		(86)
Free Cash Flow		255		266		11
Add:
Separation Costs, net of tax		4		19		15
Free Cash Flow, as Adjusted		259		285		26

EXELIS INC.
Free Cash Flow Year-to-Date
		Twelve Months Ending		Twelve Months Ending
		December 31,		December 31,
($ million)		2012		2011
Cash Flow From Operating Activities		385		334
Subtract
Capital Expenditures		(119)		(95)
Free Cash Flow		266		239
Add:
Separation Costs, net of tax		19		29
Cash Taxes Paid Adjustment		-		161
Non-Cash Allocated Postretirement Costs		-		79
Free Cash Flow, as Adjusted		285		508

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