Business Segments

We structure our operations primarily around the products, systems and services we sell and the markets we serve, and we report the financial results of our continuing operations in the following three reportable segments, which are also referred to as our business segments:


•	Communication Systems, serving markets in tactical communications and defense products, including tactical ground and airborne radio communications solutions and night vision technology, and in public safety networks;


•	Electronic Systems, providing electronic warfare, avionics, and command, control, communications, computers, intelligence, surveillance and reconnaissance (“C4ISR”) solutions for the defense industry and ATM solutions for the civil aviation industry; and


•	Space and Intelligence Systems, providing intelligence, space protection, geospatial, complete Earth observation, universe exploration, positioning, navigation and timing (“PNT”), and environmental solutions for national security, defense, civil and commercial customers, using advanced sensors, antennas and payloads, as well as ground processing and information analytics.

As described in more detail in “Basis of Presentation” in Note A — Significant Accounting Policies and Recent Accounting Standards and Note B — Discontinued Operations in these Notes, in connection with our divestiture of CapRock and entering into the definitive agreement to sell IT Services in the third quarter of fiscal 2017, our other remaining operations that had been part of our former Critical Networks segment, including our ATM business primarily serving the FAA, were integrated with our Electronic Systems segment effective for the third quarter of fiscal 2017, and our Critical Networks segment was eliminated. The historical results, discussion and presentation of our business segments as set forth in our Condensed Consolidated Financial Statements (Unaudited) and these Notes reflect the impact of these changes for all periods presented in order to present all segment information on a comparable basis. There is no impact on our previously reported consolidated statements of income, balance sheets or statements of cash flows resulting from these segment changes. Our historical results and discussion for all periods presented have been restated to account for businesses reported as discontinued operations in our Condensed Consolidated Financial Statements (Unaudited) and these Notes.

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 2017 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” and “Corporate eliminations, net” line items in the table below represent the elimination of intersegment sales and their related profits. The “Unallocated corporate expense” line item in the table below represents the portion of corporate expenses not allocated to our business segments.

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						Two Quarters Ended
	December 29, 2017			December 30, 2016			December 29, 2017			December 30, 2016

	(In millions)
Revenue
Communication Systems	$	489		$	413		$	899		$	843
Electronic Systems	584			570			1,124			1,107
Space and Intelligence Systems	465			468			931			921
Corporate eliminations	(3		)	(2		)	(6		)	(2		)
	$	1,535		$	1,449		$	2,948		$	2,869
Income From Continuing Operations Before Income Taxes
Segment Operating Income:⁽¹⁾
Communication Systems	$	144		$	121		$	262		$	239
Electronic Systems	101			134			210			245
Space and Intelligence Systems	81			76			168			155
Unallocated corporate expense⁽²⁾	(55		)	(53		)	(96		)	(114		)
Corporate eliminations, net	1			(1		)	—			(2		)
Non-operating income (loss)	(2		)	1			(2		)	2
Net interest expense	(41		)	(43		)	(82		)	(87		)
	$	229		$	235		$	460		$	438


(1)	Segment operating income for the quarter and two quarters ended December 30, 2016 included stranded costs and Financial Accounting Standards (“FAS”) pension income previously reported as part of our former Critical Networks segment but now re-allocated to our remaining three segments.

(2)

Unallocated corporate expense included (i) a $12 million adjustment for deferred compensation in the quarter and two quarters ended December 29, 2017, (ii) $13 million and $30 million of Exelis acquisition-related charges in the quarter and two quarters ended December 30, 2016, respectively, and (iii) $25 million and $50 million of expense in the quarter and two quarters ended December 29, 2017, respectively, compared with $28 million and $55 million of expense in the quarter and two quarters ended December 30, 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.

Total assets by business segment are summarized below:



	December 29, 2017		June 30, 2017

	(In millions)
Total Assets
Communication Systems	$	1,541	$	1,534
Electronic Systems	4,137		4,094
Space and Intelligence Systems	2,155		2,117
Corporate ⁽¹⁾	2,023		2,345
	$	9,856	$	10,090

(1)

Identifiable intangible assets acquired in connection with our acquisition of 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 approximately $1 billion as of December 29, 2017 and June 30, 2017. Corporate assets also consisted of cash, income taxes receivable, deferred income taxes, deferred compensation plan assets and buildings and equipment.