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 for revenue. 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% of our revenue for the three- and six-month periods ended June 30, 2019, and 78% and 76% of our revenue for the three- and six-month periods ended July 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% of our revenue for the three- and six-month periods ended June 30, 2019, and 22% and 24% of our revenue for the three- and six-month periods ended July 1, 2018, respectively. The majority of our revenue recognized

On June 30, 2019, we had $67.7 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 60% 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. The majority of our revenue is derived from long-term contracts and programs that can span several years. 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.



	Three Months Ended				Six Months Ended
	June 30, 2019		July 1, 2018		June 30, 2019		July 1, 2018
Aircraft manufacturing and completions	$	1,597	$	1,362	$	3,288	$	2,728
Aircraft services	537		531		1,044		982
Pre-owned aircraft	2		2		44		10
Total Aerospace	2,136		1,895		4,376		3,720
Military vehicles	1,090		990		2,224		1,946
Weapons systems, armament and munitions	461		443		862		826
Engineering and other services	108		101		209		202
Total Combat Systems	1,659		1,534		3,295		2,974
IT services	2,158		2,442		4,327		3,580
Total Information Technology	2,158		2,442		4,327		3,580
C4ISR solutions	1,277		1,147		2,435		2,245
Total Mission Systems	1,277		1,147		2,435		2,245
Nuclear-powered submarines	1,538		1,438		2,915		2,734
Surface ships	528		473		974		956
Repair and other services	259		257		494		512
Total Marine Systems	2,325		2,168		4,383		4,202
Total revenue	$	9,555	$	9,186	$	18,816	$	16,721

Revenue by contract type was as follows:



Three Months Ended June 30, 2019	Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
Fixed-price	$	1,925	$	1,427	$	875	$	752	$	1,575	$	6,554
Cost-reimbursement	—		221		858		484		745		2,308
Time-and-materials	211		11		425		41		5		693
Total revenue	$	2,136	$	1,659	$	2,158	$	1,277	$	2,325	$	9,555
Three Months Ended July 1, 2018
Fixed-price	$	1,696	$	1,330	$	1,059	$	658	$	1,372	$	6,115
Cost-reimbursement	—		197		930		451		795		2,373
Time-and-materials	199		7		453		38		1		698
Total revenue	$	1,895	$	1,534	$	2,442	$	1,147	$	2,168	$	9,186



Six Months Ended June 30, 2019	Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
Fixed-price	$	3,965	$	2,843	$	1,796	$	1,403	$	2,991	$	12,998
Cost-reimbursement	—		432		1,699		947		1,385		4,463
Time-and-materials	411		20		832		85		7		1,355
Total revenue	$	4,376	$	3,295	$	4,327	$	2,435	$	4,383	$	18,816
Six Months Ended July 1, 2018
Fixed-price	$	3,364	$	2,583	$	1,446	$	1,278	$	2,677	$	11,348
Cost-reimbursement	—		376		1,507		891		1,523		4,297
Time-and-materials	356		15		627		76		2		1,076
Total revenue	$	3,720	$	2,974	$	3,580	$	2,245	$	4,202	$	16,721

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 June 30, 2019	Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
U.S. government:
Department of Defense (DoD)	$	52	$	910	$	926	$	884	$	2,243	$	5,015
Non-DoD	—		3		1,178		133		1		1,315
Foreign Military Sales (FMS)	14		90		4		12		47		167
Total U.S. government	66		1,003		2,108		1,029		2,291		6,497
U.S. commercial	1,242		59		45		39		30		1,415
Non-U.S. government	141		587		5		181		2		916
Non-U.S. commercial	687		10		—		28		2		727
Total revenue	$	2,136	$	1,659	$	2,158	$	1,277	$	2,325	$	9,555
Three Months Ended July 1, 2018
U.S. government:
DoD	$	89	$	660	$	1,024	$	764	$	2,032	$	4,569
Non-DoD	—		3		1,339		130		1		1,473
FMS	19		83		7		14		39		162
Total U.S. government	108		746		2,370		908		2,072		6,204
U.S. commercial	917		58		41		36		91		1,143
Non-U.S. government	143		712		31		161		4		1,051
Non-U.S. commercial	727		18		—		42		1		788
Total revenue	$	1,895	$	1,534	$	2,442	$	1,147	$	2,168	$	9,186



Six Months Ended June 30, 2019	Aerospace		Combat Systems		Information Technology		Mission Systems		Marine Systems		Total Revenue
U.S. government:
DoD	$	175	$	1,703	$	1,850	$	1,668	$	4,218	$	9,614
Non-DoD	—		6		2,370		268		1		2,645
FMS	29		169		9		21		91		319
Total U.S. government	204		1,878		4,229		1,957		4,310		12,578
U.S. commercial	2,571		109		85		74		66		2,905
Non-U.S. government	200		1,288		13		347		4		1,852
Non-U.S. commercial	1,401		20		—		57		3		1,481
Total revenue	$	4,376	$	3,295	$	4,327	$	2,435	$	4,383	$	18,816
Six Months Ended July 1, 2018
U.S. government:
DoD	$	130	$	1,267	$	1,457	$	1,506	$	3,982	$	8,342
Non-DoD	—		4		1,976		248		1		2,229
FMS	35		152		15		21		68		291
Total U.S. government	165		1,423		3,448		1,775		4,051		10,862
U.S. commercial	1,759		116		81		63		144		2,163
Non-U.S. government	153		1,409		51		333		6		1,952
Non-U.S. commercial	1,643		26		—		74		1		1,744
Total revenue	$	3,720	$	2,974	$	3,580	$	2,245	$	4,202	$	16,721

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 six-month period ended June 30, 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, which contributed to growth in contract assets as further discussed in Note G.

Revenue recognized for the three- and six-month periods ended June 30, 2019, and July 1, 2018, that was included in the contract liability balance at the beginning of each year was $1.2 billion and $2.9 billion, and $1.1 billion and $2.6 billion, respectively. This revenue represented primarily the sale of business-jet aircraft.