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BUSINESS SEGMENTS

6 Months Ended

Jan. 03, 2020

NOTE 25: BUSINESS SEGMENTS

During the two quarters ended January 3, 2020, 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 effective June 29, 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 multi-mission ISR and communication systems; integrated electrical and electronic systems for maritime platforms; and advanced electro-optical and infrared solutions;


•	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; integrated vision solutions; and public safety; and


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

The historical results, discussion and presentation of our business segments as set forth in our Consolidated Financial Statements and these Notes reflect the impact of these adjustments to our segment reporting for all periods presented in order to present the segment information on a comparable basis. 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.

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



	Two Quarters Ended			Fiscal Years Ended
	January 3, 2020			June 28, 2019			June 29, 2018			June 30, 2017

	(In millions)
Revenue
Integrated Mission Systems	$	2,774		$	48		$	45		$	38
Space and Airborne Systems	2,360			3,715			3,304			3,156
Communication Systems	2,151			2,208			2,015			1,891
Aviation Systems	2,038			672			668			697
Other non-reportable business segments⁽¹⁾	23			165			148			121
Corporate eliminations	(83		)	(7		)	(12		)	(6		)
	$	9,263		$	6,801		$	6,168		$	5,897
Income from Continuing Operations before Income Taxes
Segment Operating Income:
Integrated Mission Systems	$	377		$	9		$	7		$	7
Space and Airborne Systems	442			697			628			559
Communication Systems	493			637			561			522
Aviation Systems	289			76			54			131
Other business activities and non-reportable business segments⁽¹⁾	—			27			20			9
Unallocated corporate expenses and corporate eliminations⁽²⁾	(140		)	(2		)	(65		)	(62		)
L3Harris Merger-related transaction and integration expenses and losses	(390		)	(65		)	—			—
Amortization of acquisition-related intangibles⁽³⁾	(289		)	(101		)	(101		)	(109		)
Gain on sale of business	229			—			—			—
Pension adjustment	(172		)	(186		)	(184		)	(164		)
Non-operating income	192			188			156			166
Net interest expense	(123		)	(167		)	(168		)	(170		)
Total	$	908		$	1,113		$	908		$	889

_______________


(1)	Includes the operating results of the Harris Night Vision business prior to the date of divestiture on September 13, 2019. See Note 3: Divestitures, Asset Sales and Discontinued Operations in these Notes for more information.

(2)

Includes: (i) $142 million of additional cost of sales related to the fair value step-up in inventory sold (see Note 5: Business Combination in these Notes for more information), a $12 million gain on the sale of an asset group and a $10 million non-cash cumulative adjustment to lease expense for the two quarters ended January 3, 2020; (ii) $47 million of charges related to our decision to transition and exit a commercial air-to-ground LTE radio communications line of business and other items, a $12 million non-cash adjustment for deferred compensation and $5 million of Exelis acquisition-related and other charges in fiscal 2018; and (iii) $58 million of Exelis acquisition-related and other charges in fiscal 2017.

(3)

Includes $239 million of amortization of identifiable intangible assets acquired as a result of the L3Harris Merger for the two quarters ended January 3, 2020 and $50 million, $101 million, $101 million and $109 million of amortization of identifiable intangible assets acquired as a result of our acquisition of Exelis for the two quarters ended January 3, 2020 and fiscal 2019, 2018 and 2017, respectively. Because the L3Harris Merger and the acquisition of Exelis 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:



	Two Quarters Ended		Fiscal Years Ended
	January 3, 2020		June 28, 2019		June 29, 2018		June 30, 2017

	(In millions)
Revenue By Customer Relationship
Prime contractor	$	1,904	$	25	$	20	$	24
Subcontractor	870		23		25		14
	$	2,774	$	48	$	45	$	38
Revenue By Contract Type
Fixed-price⁽¹⁾	$	2,138	$	48	$	45	$	37
Cost-reimbursable	636		—		—		1
	$	2,774	$	48	$	45	$	38
Revenue By Geographical Region
United States	$	2,300	$	30	$	39	$	27
International	474		18		6		11
	$	2,774	$	48	$	45	$	38

_______________


(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:



	Two Quarters Ended		Fiscal Years Ended
	January 3, 2020		June 28, 2019		June 29, 2018		June 30, 2017

	(In millions)
Revenue By Customer Relationship
Prime contractor	$	1,337	$	2,246	$	2,159	$	2,067
Subcontractor	1,023		1,469		1,145		1,089
	$	2,360	$	3,715	$	3,304	$	3,156
Revenue By Contract Type
Fixed-price⁽¹⁾	$	1,367	$	2,097	$	1,634	$	1,390
Cost-reimbursable	993		1,618		1,670		1,766
	$	2,360	$	3,715	$	3,304	$	3,156
Revenue By Geographical Region
United States	$	2,037	$	3,255	$	2,937	$	2,782
International	323		460		367		374
	$	2,360	$	3,715	$	3,304	$	3,156

_______________


(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:



	Two Quarters Ended		Fiscal Years Ended
	January 3, 2020		June 28, 2019		June 29, 2018		June 30, 2017

	(In millions)
Revenue By Customer Relationship⁽¹⁾
Prime contractor	$	1,406
Subcontractor	745
	$	2,151
Revenue By Contract Type⁽¹⁾
Fixed-price⁽²⁾	$	1,849
Cost-reimbursable	302
	$	2,151
Revenue By Geographical Region
United States	$	1,518	$	1,281	$	1,031	$	880
International	633		927		984		1,011
	$	2,151	$	2,208	$	2,015	$	1,891

_______________

(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 Fiscal Transition Period 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:



	Two Quarters Ended		Fiscal Years Ended
	January 3, 2020		June 28, 2019		June 29, 2018		June 30, 2017

	(In millions)
Revenue By Customer Relationship
Prime contractor	$	1,246	$	654	$	656	$	697
Subcontractor	792		18		12		—
	$	2,038	$	672	$	668	$	697
Revenue By Contract Type
Fixed-price⁽¹⁾	$	1,688	$	587	$	582	$	636
Cost-reimbursable	350		85		86		61
	$	2,038	$	672	$	668	$	697
Revenue By Geographical Region
United States	$	1,514	$	644	$	627	$	647
International	524		28		41		50
	$	2,038	$	672	$	668	$	697

______________


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

Total assets by business segment is as follows:



	January 3, 2020		June 28, 2019		June 29, 2018

	(In millions)
Total Assets
Integrated Mission Systems	$	7,896	$	87	$	90
Space and Airborne Systems	6,829		5,027		4,953
Communication Systems	5,930		1,683		1,724
Aviation Systems	7,569		1,036		1,046
Corporate⁽¹⁾	10,112		2,284		2,038
	$	38,336	$	10,117	$	9,851

_______________

(1)

Identifiable intangible assets acquired in connection with the L3Harris Merger in the two quarters ended January 3, 2020 and our acquisition of Exelis in fiscal 2015 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 $8.5 billion, $869 million and $974 million at January 3, 2020, June 28, 2019 and June 29, 2018, 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 of discontinued operations and divestitures. See Note 3: Divestitures, Asset Sales and Discontinued Operations for additional information.

Other selected financial information by business segment and geographical area is summarized below:



	Two Quarters Ended		Fiscal Years Ended
	January 3, 2020		June 28, 2019		June 29, 2018		June 30, 2017

	(In millions)
Capital Expenditures
Integrated Mission Systems	$	29	$	1	$	1	$	—
Space and Airborne Systems	36		48		49		49
Communication Systems	22		29		25		16
Aviation Systems	64		54		37		22
Other non-reportable business segments⁽¹⁾	—		6		4		1
Corporate	22		23		20		27
Discontinued operations	—		—		—		4
	$	173	$	161	$	136	$	119
Depreciation and Amortization
Integrated Mission Systems	$	37	$	2	$	2	$	2
Space and Airborne Systems	31		50		54		55
Communication Systems	32		49		54		60
Aviation Systems	53		29		22		5
Other non-reportable business segments⁽¹⁾	—		3		5		8
Corporate	289		125		122		142
Discontinued operations	—		—		—		39
	$	442	$	258	$	259	$	311
Geographical Information for Continuing Operations
U.S. operations:
Revenue	$	8,485	$	6,530	$	5,854	$	5,637
Long-lived assets	$	1865	$	866	$	892	$	896
International operations:
Revenue	$	778	$	271	$	314	$	260
Long-lived assets	$	252	$	28	$	8	$	8

_______________


(1)	Includes capital expenditures and depreciation and amortization of the Harris Night Vision business prior to the date of divestiture on September 13, 2019. See Note 3: Divestitures, Asset Sales and Discontinued Operations in these Notes for more information.

In addition to depreciation and amortization expense related to property, plant and equipment, “Depreciation and Amortization” in the table above also includes $285 million of amortization related to intangible assets, debt premium, debt discount, debt issuance costs and other items for the two quarters ended January 3, 2020. “Depreciation and Amortization” in the table above also includes amortization related to intangible assets, debt premium, debt discount and debt issuance costs of $120 million, $116 million and $125 million in fiscal 2019, 2018 and 2017, respectively.

Our products and systems are produced principally in the U.S. with international revenue derived primarily from exports. No revenue earned from any individual foreign country exceeded 5 percent of our total revenue during the two quarters ended January 3, 2020 or fiscal 2019, 2018 or 2017.

Sales made to U.S. Government customers, including foreign military sales funded through the U.S. Government, whether directly or through prime contractors, by all segments as a percentage of total revenue were 73 percent in the two quarters ended January 3, 2020 and 77 percent, 75 percent and 74 percent in fiscal 2019, 2018 and 2017, respectively. Revenue from services in the two quarters ended January 3, 2020 was approximately 32 percent, 16 percent, 15 percent and 39 percent of total revenue in our Integrated Mission Systems, Space and Airborne Systems, Communication Systems and Aviation Systems segments, respectively.

Revenue from products and services where the end consumer is located outside the U.S., including foreign military sales through the U.S. Government, was $2.0 billion (21 percent of our revenue) in the two quarters ended January 3, 2020. Revenue from products and services where the end consumer is located outside the U.S., including foreign military sales through the U.S. Government, was $1.5 billion (22 percent of our revenue), $1.4 billion (23 percent of our revenue) and $1.5 billion (25 percent of

our revenue) in fiscal 2019, 2018 and 2017, respectively. Export revenue and revenue from international operations in the two quarters ended January 3, 2020 was principally from the EMEA (Europe, Middle East and Africa) and APAC (Asia-Pacific) regions and Canada.