Changes in Estimates

9 Months Ended

Mar. 29, 2019

Change in Accounting Estimate [Abstract]

Changes in Estimates

Note O — Changes in Estimates

Contract Estimates

Under the POC cost-to-cost method of revenue recognition, a single estimated profit margin is used to recognize profit for each performance obligation over its period of performance. Recognition of profit on a contract requires estimates of the total cost at completion and transaction price and the measurement of progress towards completion. Due to the long-term nature of many of our contracts, developing the estimated total cost at completion and total transaction price often requires judgment. Factors that must be considered in estimating the cost of the work to be completed include the nature and complexity of the work to be performed, subcontractor performance and the risk and impact of delayed performance. Factors that must be considered in estimating the total transaction price include contractual cost or performance incentives (such as incentive fees, award fees and penalties) and other forms of variable consideration as well as our historical experience and expectation for performance on the contract. At the outset of each contract, we gauge its complexity and perceived risks and establish an estimated total cost at completion in line with these expectations. After establishing the estimated total cost at completion, we follow a standard Estimate at Completion (“EAC”) process in which we review the progress and performance on our ongoing contracts at least quarterly and, in many cases, more frequently. If we successfully retire risks associated with the technical, schedule and cost aspects of a contract, we may lower our estimated total cost at completion commensurate with the retirement of these risks. Conversely, if we are not successful in retiring these risks, we may increase our estimated total cost at completion. Additionally, as the contract progresses, our estimates of total transaction price may increase or decrease if, for example, we receive award fees that are higher or lower than expected. When adjustments in estimated total costs at completion or in estimated total transaction price are determined, the related impact on operating income is recognized using the cumulative catch-up method, which recognizes in the current period the cumulative effect of such adjustments for all prior periods. Any anticipated losses on these contracts are fully recognized in the period in which the losses become evident.

Net EAC adjustments resulting from changes in estimates impacted our operating income favorably by $6 million ($4 million after-tax or $.03 per diluted share) and $5 million ($4 million after-tax or $.03 per diluted share) for the quarter and three quarters ended March 29, 2019, respectively, and unfavorably by $4 million ($3 million after-tax or $.02 per diluted share) and $15 million ($11 million after-tax or $.09 per diluted share) for the quarter and three quarters ended March 30, 2018, respectively. Revenue recognized from performance obligations satisfied in prior periods was $18 million and $34 million for the quarter and three quarters ended March 29, 2019, respectively, and $5 million and $35 million for the quarter and three quarters ended March 30, 2018, respectively.

Income Taxes

See Note L — Income Taxes in these Notes for changes in estimates disclosures associated with our accounting for income taxes.