Contract Assets and Contract Liabilities

9 Months Ended

Oct. 02, 2020

Revenue from Contract with Customer [Abstract]

Contract Assets and Contract Liabilities

Note H — Contract Assets and Contract Liabilities

Contract assets include unbilled amounts typically resulting from revenue recognized exceeding amounts billed to customers for contracts utilizing the percentage of completion (“POC”) cost-to-cost revenue recognition method. We bill customers as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals, upon achievement of contractual milestones or upon deliveries and, in certain arrangements, the customer may withhold payment of a small portion of the contract price until contract completion. Contract liabilities include advance payments and billings in excess of revenue recognized, including deferred revenue associated with extended product warranties. Contract assets and liabilities are reported on a contract-by-contract basis at the end of each reporting period.

Contract assets and liabilities in the three quarters ended October 2, 2020 were impacted primarily by divestitures, reclassifications to assets and liabilities of disposal group held for sale, accelerated progress payments due to the U.S. Government's increase in the progress payment rate from 80 percent to 90 percent and the timing of contractual billing milestones. See Note C — Business Divestitures and Assets Sales in these Notes for additional information regarding assets and liabilities held for sale.

Contract assets and contract liabilities are summarized below:

(In millions)	October 2, 2020		January 3, 2020
Contract assets	$	2,416	$	2,459
Contract liabilities, current	(1,089)		(1,214)
Contract liabilities, non-current(1)	(76)		(87)
Net contract assets	$	1,251	$	1,158

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(1)The non-current portion of contract liabilities is included as a component of the “Other long-term liabilities” line item in our Condensed Consolidated Balance Sheet (Unaudited).

The components of contract assets are summarized below:

(In millions)	October 2, 2020		January 3, 2020
Unbilled contract receivables, gross	$	4,166	$	3,690
Progress payments and advances	(1,750)		(1,231)
Contract assets	$	2,416	$	2,459

Impairment losses related to our contract assets were not material for the quarter or three quarters ended October 2, 2020 or the quarter or three quarters ended September 27, 2019. For the quarter and three quarters ended October 2, 2020, we recognized as revenue $0.1 billion and $0.8 billion, respectively, of contract liabilities that were outstanding at January 3, 2020. For the quarter ended September 27, 2019, we recognized as revenue $0.6 billion of contract liabilities that were outstanding at June 29, 2019. Because of the L3Harris Merger and our change in fiscal year-end from June to December, revenue recognized in the three quarters ended September 27, 2019 from contract liabilities that were outstanding at the end of the prior year is not comparable.

Note U — Backlog

Backlog, which is the equivalent of our remaining performance obligations, represents the future revenue we expect to recognize as we perform on our current contracts. Backlog comprises both funded backlog (i.e., firm orders for which funding is authorized and appropriated) and unfunded backlog. Backlog excludes unexercised contract options and potential orders under ordering-type contracts, such as indefinite delivery, indefinite quantity contracts.

At October 2, 2020, our ending backlog was $20.8 billion. We expect to recognize approximately 65 percent of the revenue associated with this backlog by the end of 2021 and approximately 80 percent by the end of 2022, with the remainder to be recognized thereafter. At January 3, 2020, our ending backlog was $20.6 billion, including $380 million of backlog associated with the airport security and automation business, which was divested during the quarter ended July 3, 2020.