Business Segment Information

3 Months Ended

Apr. 03, 2020

Note V — Business Segment Information

We adjusted our segment reporting due to the L3Harris Merger 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 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. As noted in Note C — Business Divestitures and Assets Sales and elsewhere in these Notes, on May 4, 2020, following the close of the first quarter of fiscal 2020, we completed the sale of the airport security and automation business, which provided security and detection products, among others, as part of our Aviation Systems segment.

The accounting policies of our business segments are the same as those described in Note 1: “Significant Accounting Policies” in the Notes to Consolidated Financial Statements in our Fiscal Transition Period Form 10-KT. 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 (loss) and a reconciliation of segment operating income to total income from continuing operations before income taxes are as follows:



	Quarter Ended
	April 3, 2020			March 29, 2019

	(In millions)
Revenue
Integrated Mission Systems	$	1,370		$	14
Space and Airborne Systems	1,192			956
Communication Systems	1,094			580
Aviation Systems	1,011			144
Other non-reportable business segments⁽¹⁾	—			35
Corporate eliminations	(41		)	(1		)
	$	4,626		$	1,728
Income From Continuing Operations Before Income Taxes
Segment Operating Income (Loss):
Integrated Mission Systems	$	201		$	3
Space and Airborne Systems	221			174
Communication Systems	250			167
Aviation Systems	(177		)	17
Other non-reportable business segments⁽¹⁾	—			6
Unallocated corporate expenses⁽²⁾	(33		)	—
L3Harris Merger-related transaction and integration expenses	(31		)	(16		)
Amortization of acquisition-related intangibles⁽³⁾	(145		)	(25		)
Pension adjustment	(97		)	(47		)
Non-operating income	95			46
Net interest expense	(63		)	(42		)
Total	$	221		$	283

_______________


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

(2)

Includes: (i) $15 million of additional cost of sales related to the fair value step-up in inventory sold (see Note B — Business Combination in these Notes for more information); (ii) a $5 million non-cash goodwill impairment charge related to the pending divestiture of our Applied Kilovolts and Analytical Instrumentation business; and (iii) $3 million of divestiture expenses for the quarter ended April 3, 2020.

(3)

Includes $120 million of amortization of identifiable intangible assets acquired as a result of the L3Harris Merger for the quarter ended April 3, 2020 and $25 million of amortization of identifiable intangible assets acquired as a result of our acquisition of Exelis Inc. for each of the quarters ended April 3, 2020 and March 29, 2019. Because the L3Harris Merger and the acquisition of Exelis Inc. 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
	April 3, 2020		March 29, 2019

	(In millions)
Revenue By Customer Relationship
Prime contractor	$	949	$	8
Subcontractor	421		6
	$	1,370	$	14
Revenue By Contract Type
Fixed-price⁽¹⁾	$	1,025	$	14
Cost-reimbursable	345		—
	$	1,370	$	14
Revenue By Geographical Region
United States	$	1,105	$	9
International	265		5
	$	1,370	$	14

_______________

(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
	April 3, 2020		March 29, 2019

	(In millions)
Revenue By Customer Relationship
Prime contractor	$	658	$	572
Subcontractor	534		384
	$	1,192	$	956
Revenue By Contract Type
Fixed-price⁽¹⁾	$	670	$	531
Cost-reimbursable	522		425
	$	1,192	$	956
Revenue By Geographical Region
United States	$	1,003	$	846
International	189		110
	$	1,192	$	956

_______________

(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
	April 3, 2020		March 29, 2019

	(In millions)
Revenue By Customer Relationship⁽¹⁾
Prime contractor	$	740
Subcontractor	354
	$	1,094
Revenue By Contract Type⁽¹⁾
Fixed-price⁽²⁾	$	918
Cost-reimbursable	176
	$	1,094
Revenue by Geographical Region
United States	$	834	$	347
International	260		233
	$	1,094	$	580

______________

(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:



	Quarter Ended
	April 3, 2020		March 29, 2019

	(In millions)
Revenue By Customer Relationship
Prime contractor	$	664	$	140
Subcontractor	347		4
	$	1,011	$	144
Revenue By Contract Type
Fixed-price⁽¹⁾	$	841	$	122
Cost-reimbursable	170		22
	$	1,011	$	144
Revenue By Geographical Region
United States	$	749	$	143
International	262		1
	$	1,011	$	144

______________

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

Total assets by business segment are summarized below:



	April 3, 2020		January 3, 2020

	(In millions)
Total Assets
Integrated Mission Systems	$	7,999	$	7,896
Space and Airborne Systems	6,948		6,829
Communication Systems	5,928		5,930
Aviation Systems	7,423		7,569
Corporate⁽¹⁾	9,807		10,112
	$	38,105	$	38,336

_______________

(1)

Identifiable intangible assets acquired in connection with the L3Harris Merger in the quarter ended September 27, 2019 and our acquisition of Exelis Inc. 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 $8.2 billion and $8.5 billion at April 3, 2020 and January 3, 2020, 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 Assets Sales in these Notes for additional information.