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 71% and 70% of our revenue for the three- and six-month periods ended July 2, 2017, and 68% and 71% of our revenue for the three- and six-month periods ended July 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 point in time accounted for 29% and 30% of our revenue for the three- and six-month periods ended July 2, 2017, and 32% and 29% of our revenue for the three- and six-month periods ended July 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 July 2, 2017, we had $58.6 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 55% of our remaining performance obligations as revenue by 2018, an additional 30% by 2020 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 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, operating earnings and diluted earnings per share as follows:



	Three Months Ended				Six Months Ended
	July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016
Revenue	$	90	$	55	$	162	$	123
Operating earnings	121		59		171		117
Diluted earnings per share	$	0.26	$	0.12	$	0.36	$	0.24

No adjustment on any one contract was material to our unaudited Consolidated Financial Statements for the three- and six-month periods ended July 2, 2017, and July 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				Six Months Ended
	July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016
Aircraft manufacturing, outfitting and completions	$	1,600	$	1,842	$	3,229	$	3,218
Aircraft services	445		404		880		805
Pre-owned aircraft	33		38		43		42
Total Aerospace	2,078		2,284		4,152		4,065
Wheeled combat vehicles	566		545		1,126		1,108
Weapons systems, armament and munitions	409		355		755		696
Tanks and tracked vehicles	278		238		525		430
Engineering and other services	161		159		295		308
Total Combat Systems	1,414		1,297		2,701		2,542
C4ISR* solutions	1,052		1,119		2,140		2,305
Information technology (IT) services	1,052		1,096		2,110		2,238
Total Information Systems and Technology	2,104		2,215		4,250		4,543
Nuclear-powered submarines	1,342		1,278		2,546		2,665
Surface combatants	254		282		501		555
Auxiliary and commercial ships	155		152		298		301
Repair and other services	328		266		668		579
Total Marine Systems	2,079		1,978		4,013		4,100
Total revenue	$	7,675	$	7,774	$	15,116	$	15,250

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

Revenue by contract type was as follows:



Three Months Ended July 2, 2017	Aerospace		Combat Systems		Information Systems and Technology		Marine Systems		Total Revenue
Fixed-price	$	1,913	$	1,207	$	892	$	1,253	$	5,265
Cost-reimbursement	—		196		1,018		824		2,038
Time-and-materials	165		11		194		2		372
Total revenue	$	2,078	$	1,414	$	2,104	$	2,079	$	7,675
Three Months Ended July 3, 2016
Fixed-price	$	2,133	$	1,081	$	1,010	$	1,223	$	5,447
Cost-reimbursement	—		207		994		752		1,953
Time-and-materials	151		9		211		3		374
Total revenue	$	2,284	$	1,297	$	2,215	$	1,978	$	7,774



Six Months Ended July 2, 2017	Aerospace		Combat Systems		Information Systems and Technology		Marine Systems		Total Revenue
Fixed-price	$	3,815	$	2,280	$	1,822	$	2,383	$	10,300
Cost-reimbursement	—		403		2,028		1,625		4,056
Time-and-materials	337		18		400		5		760
Total revenue	$	4,152	$	2,701	$	4,250	$	4,013	$	15,116
Six Months Ended July 3, 2016
Fixed-price	$	3,774	$	2,105	$	2,087	$	2,544	$	10,510
Cost-reimbursement	—		423		2,043		1,552		4,018
Time-and-materials	291		14		413		4		722
Total revenue	$	4,065	$	2,542	$	4,543	$	4,100	$	15,250

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 July 2, 2017	Aerospace		Combat Systems		Information Systems and Technology		Marine Systems		Total Revenue
U.S. government:
Department of Defense (DoD)	$	32	$	636	$	1,137	$	2,016	$	3,821
Non-DoD	—		25		663		—		688
Foreign Military Sales (FMS)	9		83		21		40		153
Total U.S. government	41		744		1,821		2,056		4,662
U.S. commercial	877		42		94		17		1,030
Non-U.S. government	64		594		155		4		817
Non-U.S. commercial	1,096		34		34		2		1,166
Total revenue	$	2,078	$	1,414	$	2,104	$	2,079	$	7,675
Three Months Ended July 3, 2016
U.S. government:
DoD	$	64	$	499	$	1,198	$	1,840	$	3,601
Non-DoD	—		25		676		1		702
FMS	45		80		12		39		176
Total U.S. government	109		604		1,886		1,880		4,479
U.S. commercial	940		64		98		92		1,194
Non-U.S. government	238		603		181		6		1,028
Non-U.S. commercial	997		26		50		—		1,073
Total revenue	$	2,284	$	1,297	$	2,215	$	1,978	$	7,774



Six Months Ended July 2, 2017	Aerospace		Combat Systems		Information Systems and Technology		Marine Systems		Total Revenue
U.S. government:
DoD	$	72	$	1,223	$	2,312	$	3,853	$	7,460
Non-DoD	—		49		1,328		—		1,377
FMS	18		191		33		98		340
Total U.S. government	90		1,463		3,673		3,951		9,177
U.S. commercial	1,813		103		183		50		2,149
Non-U.S. government	69		1,096		331		8		1,504
Non-U.S. commercial	2,180		39		63		4		2,286
Total revenue	$	4,152	$	2,701	$	4,250	$	4,013	$	15,116
Six Months Ended July 3, 2016
U.S. government:
DoD	$	110	$	1,013	$	2,504	$	3,832	$	7,459
Non-DoD	—		45		1,394		3		1,442
FMS	90		155		24		76		345
Total U.S. government	200		1,213		3,922		3,911		9,246
U.S. commercial	1,913		119		185		177		2,394
Non-U.S. government	315		1,150		341		12		1,818
Non-U.S. commercial	1,637		60		95		—		1,792
Total revenue	$	4,065	$	2,542	$	4,543	$	4,100	$	15,250

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 six-month period ended July 2, 2017, were not materially impacted by any other factors.

Revenue recognized for the three- and six-month periods ended July 2, 2017, and July 3, 2016, that was included in the contract liability balance at the beginning of each year was $1.3 billion and $2.9 billion, and $1.4 billion and $2.8 billion, respectively. This revenue represented primarily the sale of business-jet aircraft.