REVENUE

The majority of our revenue is derived from long-term contracts and programs that can span several years. We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.

Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. Some of our contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the product lifecycle (development, production, maintenance and support). For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service.

Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct, and, therefore, are accounted for as part of the existing contract.

Our performance obligations are satisfied over time as work progresses or at a point in time. Revenue from products and services transferred to customers over time accounted for 78% and 75% of our revenue for the three- and six-month periods ended July 1, 2018, and 71% and 70% of our revenue for the three- and six-month periods ended July 2, 2017, respectively. Substantially all of our revenue in the defense segments is recognized over time because control is transferred continuously to our customers. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, G&A expenses.

Revenue from goods and services transferred to customers at a point in time accounted for 22% and 25% of our revenue for the three- and six-month periods ended July 1, 2018, and 29% and 30% of our revenue for the three- and six-month periods ended July 2, 2017, respectively. The majority of our revenue recognized at a point in time is for the manufacture of business-jet aircraft in our Aerospace segment. Revenue on these contracts is recognized when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft.

On July 1, 2018, we had $66.3 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 60% of our remaining performance obligations as revenue by year-end 2019, an additional 25% by year-end 2021 and the balance thereafter. On December 31, 2017, we had $63.2 billion of remaining performance obligations, and on December 31, 2017, we expected to recognize approximately 40% of these remaining performance obligations as revenue in 2018, an additional 40% by year-end 2020 and the balance thereafter.

Contract Estimates. Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.

Contract estimates are based on various assumptions to project the outcome of future events that often span several years. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer.

The nature of our contracts gives rise to several types of variable consideration, including claims and award and incentive fees. We include in our contract estimates additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim. We include award or incentive fees in the estimated transaction price when there is a basis to reasonably estimate the amount of the fee. These estimates are based on historical award experience, anticipated performance and our best judgment at the time. Because of our certainty in estimating these amounts, they are included in the transaction price of our contracts and the associated remaining performance obligations.

As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the period it is identified.

The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates increased our revenue, operating earnings and diluted earnings per share as follows:



	Three Months Ended				Six Months Ended
	July 1, 2018		July 2, 2017		July 1, 2018		July 2, 2017
Revenue	$	91	$	90	$	206	$	162
Operating earnings	83		121		180		171
Diluted earnings per share	$	0.22	$	0.26	$	0.47	$	0.36

No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three- and six-month periods ended July 1, 2018, or July 2, 2017.

Revenue by Category. Our portfolio of products and services consists of over 10,000 active contracts. The following series of tables presents our revenue disaggregated by several categories.

Revenue by major products and services was as follows:



	Three Months Ended				Six Months Ended
	July 1, 2018		July 2, 2017		July 1, 2018		July 2, 2017
Aircraft manufacturing and completions	$	1,362	$	1,600	$	2,728	$	3,229
Aircraft services	531		445		982		880
Pre-owned aircraft	2		33		10		43
Total Aerospace	1,895		2,078		3,720		4,152
Wheeled combat and tactical vehicles	644		566		1,269		1,126
Weapons systems, armament and munitions	443		409		826		755
Tanks and tracked vehicles	346		278		677		525
Engineering and other services	101		161		202		295
Total Combat Systems	1,534		1,414		2,974		2,701
Information technology services	2,442		1,052		3,580		2,110
Total Information Technology	2,442		1,052		3,580		2,110
Platform systems and sensors	383		393		774		783
Intelligence, surveillance and reconnaissance systems	372		333		749		662
Communication systems	392		326		722		695
Total Mission Systems	1,147		1,052		2,245		2,140
Nuclear-powered submarines	1,438		1,342		2,734		2,546
Surface combatants	276		254		541		501
Auxiliary and commercial ships	197		155		415		298
Repair and other services	257		328		512		668
Total Marine Systems	2,168		2,079		4,202		4,013
Total revenue	$	9,186	$	7,675	$	16,721	$	15,116

Revenue by contract type was as follows:



Three Months Ended July 1, 2018	Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
Fixed-price	$	1,696	$	1,330	$	1,059	$	658	$	1,372	$	6,115
Cost-reimbursement	—		197		930		451		795		2,373
Time-and-materials	199		7		453		38		1		698
Total revenue	$	1,895	$	1,534	$	2,442	$	1,147	$	2,168	$	9,186
Three Months Ended July 2, 2017
Fixed-price	$	1,913	$	1,207	$	339	$	553	$	1,253	$	5,265
Cost-reimbursement	—		196		555		463		824		2,038
Time-and-materials	165		11		158		36		2		372
Total revenue	$	2,078	$	1,414	$	1,052	$	1,052	$	2,079	$	7,675



Six Months Ended July 1, 2018	Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
Fixed-price	$	3,364	$	2,583	$	1,446	$	1,278	$	2,677	$	11,348
Cost-reimbursement	—		376		1,507		891		1,523		4,297
Time-and-materials	356		15		627		76		2		1,076
Total revenue	$	3,720	$	2,974	$	3,580	$	2,245	$	4,202	$	16,721
Six Months Ended July 2, 2017
Fixed-price	$	3,815	$	2,280	$	690	$	1,132	$	2,383	$	10,300
Cost-reimbursement	—		403		1,108		920		1,625		4,056
Time-and-materials	337		18		312		88		5		760
Total revenue	$	4,152	$	2,701	$	2,110	$	2,140	$	4,013	$	15,116

Each of these contract types presents advantages and disadvantages. Typically, we assume more risk with fixed-price contracts. However, these types of contracts offer additional profits when we complete the work for less than originally estimated. Cost-reimbursement contracts generally subject us to lower risk. Accordingly, the associated base fees are usually lower than fees earned on fixed-price contracts. Under time-and-materials contracts, our profit may vary if actual labor-hour rates vary significantly from the negotiated rates. Also, because these contracts can provide little or no fee for managing material costs, the content mix can impact profitability.

Revenue by customer was as follows:



Three Months Ended July 1, 2018	Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
U.S. government:
Department of Defense (DoD)	$	89	$	660	$	1,052	$	764	$	2,032	$	4,597
Non-DoD	—		3		1,311		130		1		1,445
Foreign Military Sales (FMS)	19		83		7		14		39		162
Total U.S. government	108		746		2,370		908		2,072		6,204
U.S. commercial	917		58		41		36		91		1,143
Non-U.S. government	143		712		31		161		4		1,051
Non-U.S. commercial	727		18		—		42		1		788
Total revenue	$	1,895	$	1,534	$	2,442	$	1,147	$	2,168	$	9,186
Three Months Ended July 2, 2017
U.S. government:
DoD	$	32	$	660	$	424	$	678	$	2,016	$	3,810
Non-DoD	—		1		551		147		—		699
FMS	9		83		6		15		40		153
Total U.S. government	41		744		981		840		2,056		4,662
U.S. commercial	877		42		65		26		17		1,027
Non-U.S. government	64		594		6		154		4		822
Non-U.S. commercial	1,096		34		—		32		2		1,164
Total revenue	$	2,078	$	1,414	$	1,052	$	1,052	$	2,079	$	7,675



Six Months Ended July 1, 2018	Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
U.S. government:
DoD	$	130	$	1,267	$	1,485	$	1,506	$	3,982	$	8,370
Non-DoD	—		4		1,948		248		1		2,201
FMS	35		152		15		21		68		291
Total U.S. government	165		1,423		3,448		1,775		4,051		10,862
U.S. commercial	1,759		116		81		63		144		2,163
Non-U.S. government	153		1,409		51		333		6		1,952
Non-U.S. commercial	1,643		26		—		74		1		1,744
Total revenue	$	3,720	$	2,974	$	3,580	$	2,245	$	4,202	$	16,721
Six Months Ended July 2, 2017
U.S. government:
DoD	$	72	$	1,269	$	845	$	1,399	$	3,853	$	7,438
Non-DoD	—		3		1,118		278		—		1,399
FMS	18		191		11		22		98		340
Total U.S. government	90		1,463		1,974		1,699		3,951		9,177
U.S. commercial	1,813		103		126		54		50		2,146
Non-U.S. government	69		1,096		10		329		8		1,512
Non-U.S. commercial	2,180		39		—		58		4		2,281
Total revenue	$	4,152	$	2,701	$	2,110	$	2,140	$	4,013	$	15,116

Contract Balances. The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. In our defense segments, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we sometimes receive advances or deposits from our customers, particularly on our international contracts, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period. In our Aerospace segment, we generally receive deposits from customers upon contract execution and upon achievement of contractual milestones. These deposits are liquidated when revenue is recognized. Changes in the contract asset and liability balances during the six-month period ended July 1, 2018, were not materially impacted by any other factors except for the acquisition of CSRA as further described in Note B.

Revenue recognized for the three- and six-month periods ended July 1, 2018, and July 2, 2017, that was included in the contract liability balance at the beginning of each year was $1.1 billion and $2.6 billion, and $1.2 billion and $2.9 billion, respectively. This revenue represented primarily the sale of business-jet aircraft.