Segment Information and Disaggregation of Net Sales

In the third quarter of 2018, the Company completed a realignment of its business segments to maximize growth and improve its integration and collaboration across the enterprise. As a result of the realignment, L3 has the following three reportable segments: (1) ISRS, (2) C&NS and (3) Electronic Systems.

The Company evaluates the performance of its operating segments and reportable segments based on their sales, operating income and operating margin. Corporate expenses are allocated to the Company’s operating segments using an allocation methodology prescribed by U.S. Government regulations for government contractors. Accordingly, segment results include all costs and expenses, except for goodwill impairment charges, gains or losses related to business divestitures, and certain other items that are excluded by management for purposes of evaluating the operating performance of the Company’s business segments. Certain Corporate and segment expenses of $15 million the year ended December 31, 2018, $32 million for the year ended December 31, 2017 and $29 million for the year ended December 31, 2016, that had previously been allocated to the Vertex Aerospace and NSS businesses were retained by the Company and were allocated to L3’s three reportable segments.

The tables below present net sales, operating income, depreciation and amortization, capital expenditures and total assets by reportable segment.



	Year Ended December 31,
	2018			2017			2016
	(in millions)
Net Sales
Products
ISRS	$	2,907		$	2,540		$	2,662
C&NS	2,307			2,424			2,238
Electronic Systems	2,007			1,814			1,617
Elimination of intercompany sales	(56		)	(45		)	(64		)
Total products sales	7,165			6,733			6,453

Services
ISRS	$	1,549		$	1,463		$	1,450
C&NS	787			717			678
Electronic Systems	789			695			653
Elimination of intercompany sales	(46		)	(35		)	(24		)
Total services sales	3,079			2,840			2,757
Consolidated total	$	10,244		$	9,573		$	9,210

Operating income
ISRS	$	448		$	348		$	362
C&NS	282			362			298
Electronic Systems	376			321			298
Segment total	1,106			1,031			958
Gain on sale of the Crestview & TCS businesses	42			—			—
Merger and acquisition related expenses	(28		)	—			—
Consolidated total	$	1,120		$	1,031		$	958

Depreciation and amortization
ISRS	$	92		$	87		$	80
C&NS	69			66			63
Electronic Systems	80			72			55
Consolidated total	$	241		$	225		$	198

Capital Expenditures
ISRS	$	57		$	74		$	83
C&NS	50			76			51
Electronic Systems	108			52			66
Corporate	17			22			10
Consolidated total	$	232		$	224		$	210



	Year Ended December 31,
	2018		2017		2016
	(in millions)
Total Assets
ISRS	$	4,720	$	4,135	$	4,117
C&NS	3,670		3,505		3,258
Electronic Systems	4,128		3,939		3,542
Corporate	1,000		709		467
Assets held for sale	—		135		—
Assets of discontinued operations	—		306		481
Consolidated total	$	13,518	$	12,729	$	11,865

The table below presents property, plant and equipment, net by geographic area.



	Year Ended December 31,
	2018		2017
	(in millions)
United States	$	973	$	936
All other	196		174
Total	$	1,169	$	1,110

The Company’s sales attributable to U.S. and international customers, based on location of the customer, are summarized in the table below.



	Year Ended December 31,
	2018		2017		2016
	(in millions)
U.S.	$	7,843	$	7,344	$	6,947
International:
Canada	312		280		297
United Kingdom	309		335		331
Australia	219		268		254
China	156		167		67
Japan	145		125		81
Saudi Arabia	128		58		159
Turkey	113		61		61
Other	1,019		935		1,013
Total international	2,401		2,229		2,263
Consolidated	$	10,244	$	9,573	$	9,210

Net sales to principal customers are summarized in the table below.



	Year Ended December 31,
	2018		2017	2016
	(in millions)
U.S. Government agencies⁽¹⁾	$	7,144	6,697	$	6,399
Commercial	1,572		1,456	1,280
Foreign governments⁽¹⁾	1,528		1,420	1,531
Consolidated	$	10,244	9,573	$	9,210

__________________


⁽¹⁾	Includes sales for which the Company is the prime contractor as well as sales based on the ultimate end customer for which the Company is a subcontractor.

Corporate assets not allocated to the reportable segments primarily include cash and cash equivalents, corporate office fixed assets, and deferred income tax assets.

Disaggregation of Total Net Sales. The Company disaggregates its sales from contracts with customers by: (1) end customer, (2) contract type, (3) deliverable type and (4) revenue recognition method for each of its segments. The Company believes these factors affect the nature, amount, timing and uncertainty of the Company’s revenue and cash flows.

Sales by End Customer. Direct sales to the end customer represented approximately 64% of the Company’s consolidated sales for the year ended December 31, 2018 and indirect sales as a subcontractor or supplier represented the remaining 36%. The table below present total net sales disaggregated by end customer.



	Year Ended December 31, 2018
End Customer	ISRS		C&NS		Electronic Systems		Consolidated L3
	(in millions)
Total DoD	$	3,081	$	2,291	$	1,349	$	6,721
Other U.S. Government	150		95		178		423
Total U.S. Government	3,231		2,386		1,527		7,144
Foreign governments ⁽¹⁾	1,006		327		195		1,528
Commercial — foreign	75		123		675		873
Commercial — domestic	129		223		347		699
Total	$	4,441	$	3,059	$	2,744	$	10,244

__________________


⁽¹⁾	Includes sales under foreign military sales agreements, which are made directly between the U.S. Government and foreign governments.

Sales by Contract Type. Generally, the sales price arrangements for the Company’s contracts are either fixed-price, cost-plus or time-and-material type. Fixed-price type contracts generally offer higher profit margin potential than cost-plus type or time-and-material type contracts due to the greater levels of risk assumed on a fixed-price type contract.

On a fixed-price type contract, the Company agrees to perform the contractual statement of work for a predetermined sales price. On a cost-plus type contract, the Company is paid its allowable incurred costs plus a profit which can be fixed or variable depending on the contract’s fee arrangement up to predetermined funding levels determined by the customer. Cost-plus type contracts with award and incentive fee provisions are the Company’s primary variable contract fee arrangement. On a time-and-material type contract, the Company is paid on the basis of direct labor hours expended at specified fixed-price hourly rates (that include wages, overhead, allowable general and administrative expenses and profit) and materials at cost.

Substantially all of the Company’s cost-plus type contracts and time-and-material type contracts are with U.S. Government customers, while sales to foreign government and commercial customers are generally transacted under fixed-price sales arrangements and are included in the Company’s fixed-price contract type sales. The table below present total net sales disaggregated by contract type.



	Year Ended December 31, 2018
Contract Type	ISRS		C&NS		Electronic Systems		Consolidated L3
	(in millions)
Fixed-price⁽¹⁾	$	2,839	$	2,202	$	2,317	$	7,358
Cost-plus⁽²⁾	1,393		768		410		2,571
Time-and-material	209		89		17		315
Total sales	$	4,441	$	3,059	$	2,744	$	10,244

__________________


⁽¹⁾	Includes fixed-price incentive fee type contracts, which contributed approximately 1% to the Company's total net sales for the year ended December 31, 2018.


⁽²⁾	Includes cost-plus award and incentive fee type contracts, which contributed approximately 4% to the Company's total net sales for the year ended December 31, 2018.

Sales by Deliverable Type: The table below present total net sales disaggregated by the type of deliverable, which is determined by the Company at the performance obligation level.



	Year Ended December 31, 2018
Sales by Deliverable Type	ISRS		C&NS		Electronic Systems		Consolidated L3
	(in millions)
Products	$	2,907	$	2,299	$	1,959	$	7,165
Services	1,534		760		785		3,079
Total sales	$	4,441	$	3,059	$	2,744	$	10,244

Revenue Recognition Method: The table below present total net sales disaggregated based on the revenue recognition method applied.



	Year Ended December 31, 2018
Revenue Recognition Method	ISRS		C&NS		Electronic Systems		Consolidated L3
	(in millions)
Over time (cost-to-cost method)	$	3,352	$	2,603	$	1,649	$	7,604
Point in time	866		359		705		1,930
Output method	74		23		343		440
Billing method	149		74		47		270
Total sales	$	4,441	$	3,059	$	2,744	$	10,244