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 within that contract 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 75% and 73% of our revenue for the three-month periods ended March 31, 2019, and April 1, 2018, 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 25% and 27% of our revenue for the three-month periods ended March 31, 2019, and April 1, 2018, 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 March 31, 2019, we had $69.2 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 65% of our remaining performance obligations as revenue by year-end 2020, an additional 25% by year-end 2022 and the balance thereafter. On December 31, 2018, we had $67.9 billion of remaining performance obligations, at which time we expected to recognize approximately 45% of these remaining performance obligations as revenue in 2019, an additional 35% by year-end 2021 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	March 31, 2019		April 1, 2018
Revenue	$	96	$	115
Operating earnings	68		97
Diluted earnings per share	$	0.18	$	0.25

No adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three-month periods ended March 31, 2019, or April 1, 2018.

Revenue by Category. Our portfolio of products and services consists of approximately 11,000 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	March 31, 2019		April 1, 2018
Aircraft manufacturing and completions	$	1,691	$	1,366
Aircraft services	507		451
Pre-owned aircraft	42		8
Total Aerospace	2,240		1,825
Military vehicles	1,134		956
Weapons systems, armament and munitions	401		383
Engineering and other services	101		101
Total Combat Systems	1,636		1,440
Information technology services	2,169		1,138
Total Information Technology	2,169		1,138
C4ISR* solutions	1,158		1,098
Total Mission Systems	1,158		1,098
Nuclear-powered submarines	1,377		1,296
Surface ships	446		483
Repair and other services	235		255
Total Marine Systems	2,058		2,034
Total revenue	$	9,261	$	7,535

* Command, control, communications, computers, intelligence, surveillance and reconnaissance.

Revenue by contract type was as follows:



Three Months Ended March 31, 2019	Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
Fixed-price	$	2,040	$	1,416	$	921	$	651	$	1,416	$	6,444
Cost-reimbursement	—		211		841		463		640		2,155
Time-and-materials	200		9		407		44		2		662
Total revenue	2,240		1,636		2,169		1,158		2,058		9,261
Three Months Ended April 1, 2018
Fixed-price	$	1,668	$	1,253	$	387	$	620	$	1,305	$	5,233
Cost-reimbursement	—		179		577		440		728		1,924
Time-and-materials	157		8		174		38		1		378
Total revenue	1,825		1,440		1,138		1,098		2,034		7,535

Our segments operate under fixed-price, cost-reimbursement and time-and-materials contracts. Our production contracts are primarily fixed-price. Under these contracts, we agree to perform a specific scope of work for a fixed amount. Contracts for research, engineering, repair and maintenance, and other services are typically cost-reimbursement or time-and-materials. Under cost-reimbursement contracts, the customer reimburses contract costs incurred and pays a fixed, incentive or award-based fee. These fees are determined by our ability to achieve targets set in the contract, such as cost, quality, schedule and performance. Under time-and-materials contracts, the customer pays a fixed hourly rate for direct labor and generally reimburses us for the cost of materials.

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 March 31, 2019	Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
U.S. government:
Department of Defense (DoD)	$	123	$	793	$	950	$	784	$	1,975	$	4,625
Non-DoD	—		3		1,166		135		—		1,304
Foreign Military Sales (FMS)	15		79		5		9		44		152
Total U.S. government	138		875		2,121		928		2,019		6,081
U.S. commercial	1,329		50		40		35		36		1,490
Non-U.S. government	59		701		8		166		2		936
Non-U.S. commercial	714		10		—		29		1		754
Total revenue	2,240		1,636		2,169		1,158		2,058		9,261
Three Months Ended April 1, 2018
U.S. government:
DoD	$	41	$	607	$	433	$	742	$	1,950	$	3,773
Non-DoD	—		1		637		118		—		756
FMS	16		69		8		7		29		129
Total U.S. government	57		677		1,078		867		1,979		4,658
U.S. commercial	842		58		40		27		53		1,020
Non-U.S. government	10		697		20		172		2		901
Non-U.S. commercial	916		8		—		32		—		956
Total revenue	$	1,825	$	1,440	$	1,138	$	1,098	$	2,034	$	7,535

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 three-month period ended March 31, 2019, were not materially impacted by any other factors except for the delays in payment on an international wheeled armored vehicle contract in our Combat Systems segment as further discussed in Note G.

Revenue recognized for the three-month periods ended March 31, 2019, and April 1, 2018, that was included in the contract liability balance at the beginning of each year was $1.7 billion and $1.5 billion, respectively. This revenue represented primarily the sale of business-jet aircraft.