REVENUE

The following is a description of principal activities from which the Company generates its revenues. For more detailed information regarding reportable segments, see Note 9: Segment Information. For more detailed information regarding the Company's significant accounting policy for revenue, see Note 2: Basis of Presentation.

U.S. Government Contracts

The Ingalls and Newport News segments generate revenue primarily from performance under multi-year contracts with the U.S. Government, generally the U.S. Navy and U.S. Coast Guard, or prime contractors to contracts with the U.S. Government, relating to the advance planning, design, construction, repair, maintenance, refueling, overhaul, or inactivation of nuclear-powered ships and non-nuclear ships. The period over which the Company performs may extend past five years. The Technical Solutions segment also generates the majority of its revenue from contracts with the U.S. Government, including U.S. Government agencies. The Company generally invoices and receives related payments based upon performance progress no less frequently than monthly.

Shipbuilding - For most of the Company's shipbuilding contracts, the customer contracts with the Company to provide a comprehensive service of designing, procuring long-lead-time materials, manufacturing, and integrating complex equipment and technologies into a single ship or project, often resulting in a single performance obligation. Contract modifications to account for changes in specifications and requirements are recognized when approved by the customer. In the majority of circumstances, modifications do not result in additional performance obligations that are distinct from the existing performance obligations in the contract and the effects of the modifications are recognized as an adjustment to revenue on a cumulative catch-up basis. Alternatively, in instances where the performance obligations in the modifications are deemed distinct, contract modifications are accounted for prospectively.

The Company considers incentive and award fees to be variable consideration and includes in the transaction price at inception the consideration to which the Company expects to be entitled under the terms and conditions of the contract, generally estimated using a most likely amount approach. Transaction price is limited to the extent of funding allotted by the customer and available for performance, and estimated revenues represent those amounts for which the Company believes a significant reversal of revenue is not probable.

The Company recognizes revenues related to shipbuilding contracts as it satisfies the related performance obligations over time using a cost-to-cost input method to measure performance progress, which best reflects the transfer of control to the customer.

Services - The Technical Solutions segment generates revenue primarily under U.S. Government contracts from the provision of fleet support and MDIS services. Contracts generally are structured using either an Indefinite Delivery/Indefinite Quantity ("IDIQ") vehicle, under which orders are issued, or a standalone contract. Contracts may be fixed-price or cost-type, include variable consideration such as incentives and awards, and structured as task orders under an IDIQ contract vehicle or requirements contract vehicle. In either case, the Company generally performs over the course of a short-duration period and may continue to perform upon exercise of related period of performance options that are also short in duration, generally one year. The Company’s performance obligations vary in nature and may be stand-ready, in which case the Company responds to the customer’s needs on the basis of its demand, a recurring service, in the case of recurring maintenance services, or a single performance obligation that does not comprise a series of distinct services.

In determining transaction price, the Company considers incentives and other contingencies to be variable consideration and includes in the initial transaction price the consideration to which the Company expects to be entitled under the terms and conditions of the contract, generally estimated using a most likely amount approach. Transaction price is limited to the extent of funding allotted by the customer and available for performance, and estimated revenues represent those amounts for which the Company believes a significant reversal of revenue is not probable. Where a series of distinct services has been identified, the Company generally allocates variable consideration to distinct time increments of service.

The Company generally recognizes revenue as it satisfies the related performance obligations over time using a cost-to-cost input method to measure performance progress, because, even where the Company has identified a series of services, its cost incurrence pattern generally is not ratable given the complex nature of the services the Company provides. Invoices are issued and related payments are received, on the basis of performance progress, no less frequently than monthly. In addition, many of the Company's U.S. Government services contracts are time and material arrangements. As a result, the Company often utilizes the practical expedient allowing the recognition of revenue in the amount the Company invoices, which corresponds with the value provided to the customer and to which the Company is entitled to payment for performance to date.

Non-U.S. Government Contracts

Revenues generated under commercial and state and local government agency contracts are primarily derived from the provision of nuclear and environmental and oil and gas services. Non-U.S. Government contracts typically are one or two years in duration.

In determining transaction price, the Company considers incentives and other contingencies to be variable consideration and includes in the initial transaction price the consideration to which the Company expects to be entitled under the terms and conditions of the contract, generally estimated using a most likely amount approach. In the context of variable consideration, the Company limits the transaction price to amounts for which the Company believes a significant reversal of revenue is not probable. Such amounts may relate to transaction price in excess of funding, a lack of history with the customer, a lack of history with the goods or services being provided, or other items.

Revenue generally is recognized over time given the terms and conditions of the related contracts. The Company generally utilizes a cost-to-cost input method to measure performance progress, which best depicts the transfer of control to the customer. The Company’s non-U.S. Government contract portfolio is comprised of a large number of time and material arrangements. As a result, the Company often utilizes the practical expedient allowing the recognition of revenue in the amount the Company invoices, which corresponds with the value provided to the customer and to which the Company is entitled to payment for performance to date.

Disaggregation of Revenue

The following tables present revenues on a disaggregated basis, in a manner that reconciles with the Company's reportable segment disclosures, for the following categories: product versus service type, customer type, contract type, and major program. See Note 9: Segment Information. The Company believes that this level of disaggregation provides investors with information to evaluate the Company’s financial performance and provides the Company with information to make capital allocation decisions in the most appropriate manner.



	Three Months Ended September 30, 2018
($ in millions)	Ingalls		Newport News		Technical Solutions		Intersegment Eliminations			Total
Revenue Type
Product sales	$	636	$	891	$	20	$	—		$	1,547
Service revenues	56		286		194		—			536
Intersegment	2		2		31		(35		)	—
Sales and service revenues	$	694	$	1,179	$	245	$	(35	)	$	2,083
Customer Type
Federal	$	692	$	1,177	$	155	$	—		$	2,024
Commercial	—		—		59		—			59
Intersegment	2		2		31		(35		)	—
Sales and service revenues	$	694	$	1,179	$	245	$	(35	)	$	2,083
Contract Type
Firm fixed-price	$	31	$	2	$	33	$	—		$	66
Fixed-price incentive	569		472		—		—			1,041
Cost-type	92		703		90		—			885
Time and materials	—		—		91		—			91
Intersegment	2		2		31		(35		)	—
Sales and service revenues	$	694	$	1,179	$	245	$	(35	)	$	2,083



	Nine Months Ended September 30, 2018
($ in millions)	Ingalls		Newport News		Technical Solutions		Intersegment Eliminations			Total
Revenue Type
Product sales	$	1,747	$	2,616	$	53	$	—		$	4,416
Service revenues	159		823		579		—			1,561
Intersegment	2		5		89		(96		)	—
Sales and service revenues	$	1,908	$	3,444	$	721	$	(96	)	$	5,977
Customer Type
Federal	$	1,906	$	3,439	$	447	$	—		$	5,792
Commercial	—		—		184		—			184
State and local government agencies	—		—		1		—			1
Intersegment	2		5		89		(96		)	—
Sales and service revenues	$	1,908	$	3,444	$	721	$	(96	)	$	5,977
Contract Type
Firm fixed-price	$	73	$	6	$	114	$	—		$	193
Fixed-price incentive	1,583		1,369		1		—			2,953
Cost-type	250		2,064		275		—			2,589
Time and materials	—		—		242		—			242
Intersegment	2		5		89		(96		)	—
Sales and service revenues	$	1,908	$	3,444	$	721	$	(96	)	$	5,977



	Three Months Ended September 30			Nine Months Ended September 30
($ in millions)	2018			2018
Major Programs
Amphibious assault ships	$	356		$	971
Surface combatants and coast guard cutters	336			934
Other	2			3
Total Ingalls	694			1,908
Aircraft carriers	647			1,888
Submarines	369			1,114
Other	163			442
Total Newport News	1,179			3,444
Government and energy services	194			589
Oil and gas services	51			132
Total Technical Solutions	245			721
Intersegment eliminations	(35		)	(96		)
Sales and service revenues	$	2,083		$	5,977

As of September 30, 2018, the Company had $21.9 billion of remaining performance obligations. The Company expects to recognize approximately 40% of its remaining performance obligations as revenue through 2019, an additional 40% through 2021, and the balance thereafter.

Cumulative Catch-up Adjustments

For the three months ended September 30, 2018 and 2017, net cumulative catch-up adjustments increased operating income by $34 million and $56 million, respectively, and increased diluted earnings per share by $0.62 and $0.79, respectively. For the nine months ended September 30, 2018 and 2017, net cumulative catch-up adjustments increased operating income by $99 million and $142 million, respectively, and increased diluted earnings per share by $1.78 and $2.01, respectively. No individual adjustment was material to the Company's unaudited condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2018 and 2017.

Contract Balances

Contract balances include accounts receivable, contract assets, and contract liabilities from contracts with customers. Accounts receivable represent an unconditional right to consideration and include amounts billed and currently due from customers. Contract assets primarily relate to the Company's rights to consideration for work completed but not billed as of the reporting date when the right to payment is not just subject to the passage of time. Fixed-price contracts are generally billed to the customer using either progress payments, whereby amounts are billed monthly as costs are incurred or work is completed, or performance based payments, which are based upon the achievement of specific, measurable events or accomplishments defined and valued at contract inception. Cost-type contracts are typically billed to the customer on a monthly or semi-monthly basis. Contract liabilities relate to advance payments, billings in excess of revenues, and deferred revenue amounts.

The Company reports contract balances in a net contract asset or contract liability position on a contract-by-contract basis at the end of each reporting period. The Company’s net contract assets increased $159 million from December 31, 2017 to September 30, 2018, primarily due to an increase in contract assets as a result of revenue on certain U.S. Navy contracts. For the nine months ended September 30, 2018, the Company recognized revenue of $87 million related to its contract liabilities as of December 31, 2017.