Business Segments

9 Months Ended

Mar. 31, 2017

Segment Reporting [Abstract]

Business Segments

Business Segments

We report the financial results of our operations in the following three segments, which are also referred to as our business segments:

• Communication Systems, serving markets in tactical communications and defense and public safety networks;

• Space and Intelligence Systems, providing complete Earth observation, environmental, geospatial, space protection, and intelligence solutions from advanced sensors and payloads, as well as ground processing and information analytics; and

• Electronic Systems, offering an extensive portfolio of solutions in electronic warfare, avionics, wireless technology, command, control, communications, computers and intelligence, undersea systems and managed services supporting air traffic management.

As described in more detail in “Basis of Presentation” in Note A — Significant Accounting Policies and Recent Accounting Standards, Note B — Discontinued Operations and Note S — Subsequent Events in these Notes, we completed the sale of CapRock on January 1, 2017 pursuant to a definitive agreement entered into November 1, 2016, and we completed the sale of IT Services on April 28, 2017 pursuant to a definitive agreement entered into January 26, 2017. CapRock and IT Services were part of our former Critical Networks segment and are reported as discontinued operations in this Report.

Effective for the quarter ended March 31, 2017, our Critical Networks segment was eliminated, and our operations that had been part of our Critical Networks segment, other than CapRock and IT Services, were operated as part of our Electronic Systems segment. Those operations included our air traffic management business, primarily serving the FAA, and our PMRF program.

The accounting policies of our business segments are the same as those described in Note 1: “Significant Accounting Policies” in our Notes to Consolidated Financial Statements in our Fiscal 2016 Form 10-K. We evaluate each segment’s performance based on its operating income or loss, which we define as profit or loss from operations before income taxes excluding interest income and expense, royalties and related intellectual property expenses, equity method investment income or loss and gains or losses from securities and other investments. Intersegment sales are generally transferred at cost to the buying segment, and the sourcing segment recognizes a profit that is eliminated. The “Corporate eliminations” line items in the tables below mainly represent the elimination of intersegment sales and their related profits. The “Unallocated corporate expense” line item in the tables below represents the portion of corporate expenses not allocated to our business segments.

Total assets by business segment are summarized below:

	March 31, 2017		July 1, 2016
	(In millions)
Total Assets
Communication Systems	$	1,600	$	1,667
Space and Intelligence Systems	2,149		2,149
Electronic Systems	4,157		4,094
Corporate (1) (2)	3,201		4,099
	$	11,107	$	12,009

(1) Identifiable intangible assets acquired in connection with our acquisition of Exelis Inc. (“Exelis”) in the fourth quarter of fiscal 2015 were recorded as Corporate assets because they benefit the entire Company as opposed to any individual segment. Exelis identifiable intangible asset balances recorded as Corporate assets were $1.3 billion and $1.4 billion as of March 31, 2017 and July 1, 2016, respectively.

(2) Corporate assets include the assets and liabilities of discontinued operations. See Note B — Discontinued Operations in these Notes for additional information regarding discontinued operations.

Segment revenue, segment operating income and a reconciliation of segment operating income to total income from continuing operations before income taxes follow:

	Quarter Ended						Three Quarters Ended
	March 31, 2017			April 1, 2016			March 31, 2017			April 1, 2016
	(In millions)
Revenue
Communication Systems	$	461		$	485		$	1,304		$	1,428
Space and Intelligence Systems	475			489			1,396			1,370
Electronic Systems	553			575			1,660			1,662
Corporate eliminations, net	—			1			(2		)	(1		)
	$	1,489		$	1,550		$	4,358		$	4,459
Income From Continuing Operations Before Income Taxes
Segment Operating Income:
Communication Systems (1)	$	140		$	151		$	379		$	405
Space and Intelligence Systems	76			75			231			208
Electronic Systems	115			111			360			311
Unallocated corporate expense (2)	(55		)	(68		)	(169		)	(116		)
Corporate eliminations	(1		)	(1		)	(3		)	(3		)
Non-operating income (loss)	—			(1		)	2			—
Net interest expense	(42		)	(46		)	(129		)	(138		)
	$	233		$	221		$	671		$	667

(1) Communication Systems operating income included $17 million of charges in the three quarters ended April 1, 2016, primarily related to workforce reductions, facility consolidation and other items. We recorded $14 million of these charges in the “Cost of product sales and services” line item and the remaining $3 million of these charges in the “Engineering, selling and administrative expenses” line item in the accompanying Condensed Consolidated Statement of Income (Unaudited).

(2) Unallocated corporate expense included: (i) the impact of a net liability reduction of $101 million in the three quarters ended April 1, 2016 for certain post-employment benefit plans, (ii) charges of $8 million and $38 million in the quarter and three quarters ended March 31, 2017, respectively, compared with charges of $25 million and $95 million in the quarter and three quarters ended April 1, 2016, respectively, for Exelis acquisition-related and other charges and (iii) $27 million and $82 million of expense in the quarters and three quarters ended March 31, 2017 and April 1, 2016, respectively, for amortization of identifiable intangible assets acquired as a result of our acquisition of Exelis. Because the acquisition of Exelis benefited the entire Company as opposed to any individual segment, the amortization of identifiable intangible assets acquired in the Exelis acquisition was recorded as unallocated corporate expense.