Business Segment Information

3 Months Ended

Sep. 27, 2019

Note X — Business Segment Information

During the quarter ended September 27, 2019, we adjusted our segment reporting to reflect our new organizational structure announced July 1, 2019. We structure our operations primarily around the products and services we sell and the markets we serve, and commencing with the the quarter ended September 27, 2019, we report the financial results of our operations in the following four operating segments, which are also our reportable segments and are referred to as our business segments:


•	Integrated Mission Systems, including ISR; advanced electro-optical and infrared solutions; and maritime power and navigation;


•	Space and Airborne Systems, including space payloads, sensors and full-mission solutions; classified intelligence and cyber defense; avionics; and electronic warfare;


•	Communication Systems, including tactical communications; broadband communications; night vision; and public safety; and


•	Aviation Systems, including defense aviation products; security, detection and other commercial aviation products; air traffic management; and commercial and military pilot training.

The historical results, discussion and presentation of our business segments as set forth in this Report reflect the impact of these adjustments for all periods presented. There is no impact on our previously reported consolidated statements of income, balance sheets, statements of cash flows or statements of equity resulting from these adjustments.

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 2019 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, including pension income and 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 may recognize a profit that is eliminated. The “Corporate eliminations” line item in the table below represents the elimination of intersegment sales. Corporate expenses are allocated to our operating segments using an allocation methodology prescribed by U.S. Government regulations for government contractors. The “Pension adjustment” line item in the table below represents the reconciliation of the non-service components of net periodic pension and postretirement benefit costs, which are a component of segment operating income but are included in the “Non-operating income” line item in our Condensed Consolidated Statement of Income (Unaudited). The non-service components of net periodic pension and postretirement benefit costs include interest cost, expected return on plan assets and amortization of net actuarial gain or loss.

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



	Quarter Ended
	September 27, 2019			September 28, 2018

	(In millions)
Revenue
Integrated Mission Systems	$	1,303		$	12
Space and Airborne Systems	1,162			840
Communication Systems	1,032			480
Aviation Systems	948			172
Other non-reportable business segments⁽¹⁾	23			39
Corporate eliminations	(37		)	(1		)
	$	4,431		$	1,542
Income From Continuing Operations Before Income Taxes
Segment Operating Income:
Integrated Mission Systems	$	180		$	2
Space and Airborne Systems	226			156
Communication Systems	234			137
Aviation Systems	127			24
Other business activities and non-reportable business segments⁽²⁾	(93		)	6
Merger, acquisition and divestiture-related expenses and losses	(281		)	—
Amortization of acquisition-related intangibles⁽³⁾	(123		)	(25		)
Gain on sale of business	229			—
Pension adjustment	(80		)	(47		)
Non-operating income	79			47
Net interest expense	(58		)	(43		)
	$	440		$	257

_______________


(1)	Includes Harris Night Vision business revenues prior to the date of divestiture on September 13, 2019. See Note C — Business Divestitures and Asset Sales in these Notes for more information.


(2)	Includes $92 million of additional cost of sales related to the fair value step-up in inventory sold (see Note C — Business Divestitures and Asset Sales and Note B — Business Combination in these Notes for more information), a $12 million gain on the sale of an asset group and a $12 million non-cash cumulative adjustment to lease expense for the quarter ended September 27, 2019.

(3)

Includes $25 million of amortization of identifiable intangible assets acquired as a result of our acquisition of Exelis Inc. for the quarters ended September 27, 2019 and September 28, 2018 and $98 million of amortization of identifiable intangible assets acquired as a result of the L3Harris Merger. for the quarter ended September 27, 2019. Because the acquisition of Exelis Inc. and the L3Harris Merger benefited the entire Company as opposed to any individual segment, the amortization of identifiable intangible assets acquired was not allocated to any segment.

Disaggregation of Revenue

Integrated Mission Systems: Integrated Mission Systems revenue is primarily derived from U.S. Government development and production contracts and is generally recognized over time using the POC cost-to-cost revenue recognition method. We disaggregate Integrated Mission Systems revenue by customer relationship, contract type and geographical region. We believe these categories best depict how the nature, amount, timing and uncertainty of Integrated Mission Systems revenue and cash flows are affected by economic factors:



	Quarter Ended
	September 27, 2019		September 28, 2018

	(In millions)
Revenue By Customer Relationship
Prime contractor	$	890	$	6
Subcontractor	413		6
	$	1,303	$	12
Revenue By Contract Type
Fixed-price⁽¹⁾	$	1,021	$	12
Cost-reimbursable	282		—
	$	1,303	$	12
Revenue By Geographical Region
United States	$	1,074	$	9
International	229		3
	$	1,303	$	12

_______________

(1) Includes revenue derived from time-and-materials contracts.

Space and Airborne Systems: Space and Airborne Systems revenue is primarily derived from U.S. Government development and production contracts and is generally recognized over time using the POC cost-to-cost revenue recognition method. We disaggregate Space and Airborne Systems revenue by customer relationship, contract type and geographical region. We believe these categories best depict how the nature, amount, timing and uncertainty of Space and Airborne Systems revenue

and cash flows are affected by economic factors:



	Quarter Ended
	September 27, 2019		September 28, 2018

	(In millions)
Revenue By Customer Relationship
Prime contractor	$	697	$	510
Subcontractor	465		330
	$	1,162	$	840
Revenue By Contract Type
Fixed-price⁽¹⁾	$	691	$	473
Cost-reimbursable	471		367
	$	1,162	$	840
Revenue By Geographical Region
United States	$	1,015	$	714
International	147		126
	$	1,162	$	840

_______________

(1) Includes revenue derived from time-and-materials contracts.

Communication Systems: Communication Systems revenue is primarily derived from fixed-price contracts and is generally recognized at the point in time when products are received and accepted by the customer for standard products offered to multiple customers and over time for customer-specific products, systems and services. We disaggregate Communication Systems revenue by customer relationship, contract type and geographical region. We believe these categories best depict how the nature, amount, timing and uncertainty of Communication Systems revenue and cash flows are affected by economic factors:



	Quarter Ended
	September 27, 2019		September 28, 2018

	(In millions)
Revenue By Customer Relationship⁽¹⁾
Prime contractor	$	679
Subcontractor	353
	$	1,032
Revenue By Contract Type⁽¹⁾
Fixed-price⁽²⁾	$	875
Cost-reimbursable	157
	$	1,032
Revenue by Geographical Region
United States	$	721	$	221
International	311		259
	$	1,032	$	480

______________

(1) Prior to the L3Harris Merger, Communication Systems did not recognize significant revenue for customer-specific products and systems, and currently, such customer arrangements primarily exist at operating businesses acquired in connection with the L3Harris Merger. The “Revenue by Customer Relationship” and “Revenue by Contract Type” disaggregation categories were added beginning in the quarter ended September 27, 2019 to best depict how the nature, amount, timing and uncertainty of revenue and cash flows from these types of customer arrangements are affected by economic factors.

(2) Includes revenue derived from time-and-materials contracts.

Aviation Systems: Aviation Systems revenue is primarily derived from fixed-price contracts and is generally recognized at the point in time when products are received and accepted by the customer for standard products offered to multiple customers and over time for customer-specific products, systems and services. We disaggregate Aviation Systems revenue by customer relationship, contract type and geographical region. We believe these categories best depict how the nature, amount, timing and uncertainty of Aviation Systems revenue and cash flows are affected by economic factors:



	Quarter Ended
	September 27, 2019		September 28, 2018

	(In millions)
Revenue By Customer Relationship
Prime contractor	$	584	$	168
Subcontractor	364		4
	$	948	$	172
Revenue By Contract Type
Fixed-price⁽¹⁾	$	784	$	152
Cost-reimbursable	164		20
	$	948	$	172
Revenue By Geographical Region
United States	$	724	$	162
International	224		10
	$	948	$	172

______________

(1) Includes revenue derived from time-and-materials contracts.

Total assets by business segment are summarized below:



	September 27, 2019		June 28, 2019

	(In millions)
Total Assets
Integrated Mission Systems	$	8,666	$	87
Space and Airborne Systems	6,767		5,027
Communication Systems	5,145		1,683
Aviation Systems	8,723		1,036
Corporate⁽¹⁾	9,646		2,284
	$	38,947	$	10,117

_______________

(1)

Identifiable intangible assets acquired in connection with our acquisition of Exelis Inc. in fiscal 2015 and the L3Harris Merger in the quarter ended September 27, 2019 were recorded as Corporate assets because they benefited the entire Company as opposed to any individual segment. Identifiable intangible asset balances recorded as Corporate assets were approximately $7.5 billion and $869 million at September 27, 2019 and June 28, 2019, respectively. Corporate assets also consisted of cash, income taxes receivable, deferred income taxes, deferred compensation plan investments, buildings and equipment, as well as any assets and liabilities from discontinued operations and divestitures. See Note C — Business Divestitures and Asset Sales in these Notes for additional information.