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, which we adopted on January 1, 2017, using the retrospective method. See Note Q for further discussion of the adoption, including the impact on our 2016 financial statements.

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, therefore, not distinct. 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.

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 70 percent and 73 percent of our revenue for the three-month periods ended April 2, 2017, and April 3, 2016, respectively. Substantially all of our revenue in the defense groups is recognized over time. Typically, revenue is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Contract costs include labor, material, overhead and, when appropriate, G&A expenses.

Revenue from goods and services transferred to customers at a single point in time accounted for 30 percent and 27 percent for the three-month periods ended April 2, 2017, and April 3, 2016, respectively. The majority of our revenue recognized at a point in time is for the manufacture of business-jet aircraft in our Aerospace group. Revenue on these contracts is recognized when the customer accepts the fully outfitted aircraft.

On April 2, 2017, we had $60.4 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 30 percent of our remaining performance obligations as revenue in 2017, an additional 45 percent by 2019 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 is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is 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 quarter 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 and operating earnings (and diluted earnings per share) by $72 and $50 ($0.11) for the three-month period ended April 2, 2017, and $68 and $58 ($0.12) for the three-month period ended April 3, 2016, respectively. No adjustment on any one contract was material to our unaudited Consolidated Financial Statements for the three-month periods ended April 2, 2017, and April 3, 2016.

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 product line was as follows:



Three Months Ended	April 2, 2017		April 3, 2016
Aircraft manufacturing, outfitting and completions	$	1,629	$	1,376
Aircraft services	435		401
Pre-owned aircraft	10		4
Total Aerospace	2,074		1,781
Wheeled combat vehicles	560		563
Weapons systems, armament and munitions	346		341
Tanks and tracked vehicles	247		192
Engineering and other services	134		149
Total Combat Systems	1,287		1,245
C4ISR* solutions	1,088		1,186
Information technology (IT) services	1,058		1,142
Total Information Systems and Technology	2,146		2,328
Nuclear-powered submarines	1,204		1,387
Surface combatants	247		273
Auxiliary and commercial ships	143		149
Repair and other services	340		313
Total Marine Systems	1,934		2,122
Total revenue	$	7,441	$	7,476

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

Revenue by contract type was as follows:



Three Months Ended April 2, 2017	Aerospace		Combat Systems		Information Systems and Technology		Marine Systems		Total Revenue
Fixed-price	$	1,902	$	1,073	$	930	$	1,130	$	5,035
Cost-reimbursement	—		207		1,010		801		2,018
Time-and-materials	172		7		206		3		388
Total revenue	$	2,074	$	1,287	$	2,146	$	1,934	$	7,441
Three Months Ended April 3, 2016
Fixed-price	$	1,641	$	1,024	$	1,077	$	1,321	$	5,063
Cost-reimbursement	—		216		1,049		800		2,065
Time-and-materials	140		5		202		1		348
Total revenue	$	1,781	$	1,245	$	2,328	$	2,122	$	7,476

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 costs 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 April 2, 2017	Aerospace		Combat Systems		Information Systems and Technology		Marine Systems		Total Revenue
U.S. government:
Department of Defense (DoD)	$	40	$	587	$	1,175	$	1,837	$	3,639
Non-DoD	—		24		665		—		689
Foreign Military Sales (FMS)	9		108		12		58		187
Total U.S. government	49		719		1,852		1,895		4,515
U.S. commercial	936		61		89		33		1,119
Non-U.S. government	5		502		176		4		687
Non-U.S. commercial	1,084		5		29		2		1,120
Total revenue	$	2,074	$	1,287	$	2,146	$	1,934	$	7,441
Three Months Ended April 3, 2016
U.S. government:
DoD	$	46	$	514	$	1,306	$	1,992	$	3,858
Non-DoD	—		20		718		2		740
FMS	45		75		12		37		169
Total U.S. government	91		609		2,036		2,031		4,767
U.S. commercial	973		55		87		85		1,200
Non-U.S. government	77		547		160		6		790
Non-U.S. commercial	640		34		45		—		719
Total revenue	$	1,781	$	1,245	$	2,328	$	2,122	$	7,476

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 groups, 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 group, 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 April 2, 2017, were not materially impacted by any other factors.

Revenue recognized for the three-month periods ended April 2, 2017, and April 3, 2016, that was included in the contract liability balance at the beginning of each year was $1.7 billion and $1.4 billion, respectively, and represented primarily revenue from the sale of business-jet aircraft.