Revenue

6 Months Ended

Jul. 02, 2023

Revenue Recognition [Abstract]

Revenue

REVENUE

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 life cycle (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 80% and 81% of our revenue for the three- and six-month periods ended July 2, 2023, respectively, and 80% of our revenue for the three- and six-month periods ended July 3, 2022. 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 costs represent 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 20% and 19% of our revenue for the three- and six-month periods ended July 2, 2023, respectively, and 20% of our revenue for the three- and six-month periods ended July 3, 2022. Most of our revenue recognized at a point in time is for the manufacture of business jet aircraft in our Aerospace segment. Revenue on these contracts is recognized when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft.

On July 2, 2023, we had $91.4 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 53% of our remaining performance obligations as revenue by year-end 2024, an additional 31% by year-end 2026 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, award fees and incentive fees. We include in our contract estimates additional revenue for 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 fees 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.

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.

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, 2023		July 3, 2022		July 2, 2023		July 3, 2022
Revenue	$	58	$	112	$	152	$	219
Operating earnings	10		101		87		206
Diluted earnings per share	$	0.03	$	0.29	$	0.25	$	0.58

While no adjustment on any one contract was material to the unaudited Consolidated Financial Statements for the three- and six-month periods ended July 2, 2023, or July 3, 2022, our Marine Systems segment’s 2023 results were affected negatively by supply chain impacts to the Virginia-class submarine schedule and cost growth on the Arleigh Burke-class (DDG-51) guided-missile destroyer program, offset partially by improved performance on the John Lewis-class (T-AO-205) fleet replenishment oiler program.

Our Virginia-class submarine contracts include provisions for various equitable adjustments, which is a process for obtaining contract modifications (see discussion above on variable consideration). We have included in our contract estimates additional revenue on the Virginia-class contract for the estimated value of these adjustments. It is reasonably possible that the actual amount sustained in this process could be less than our estimate, which could have a material unfavorable impact on our results of operations.

Revenue by Category. Our portfolio of products and services consists of approximately 10,000 active contracts. The following series of tables presents our revenue disaggregated by several categories.

Revenue by major products and services was as follows:

	Three Months Ended				Six Months Ended
	July 2, 2023		July 3, 2022		July 2, 2023		July 3, 2022
Aircraft manufacturing	$	1,216	$	1,112	$	2,367	$	2,374
Aircraft services	737		755		1,478		1,396
Total Aerospace	1,953		1,867		3,845		3,770
Nuclear-powered submarines	2,122		1,710		4,159		3,472
Surface ships	638		611		1,319		1,204
Repair and other services	299		330		573		626
Total Marine Systems	3,059		2,651		6,051		5,302
Military vehicles	1,280		1,084		2,427		2,179
Weapons systems, armament and munitions	473		418		911		834
Engineering and other services	171		164		342		328
Total Combat Systems	1,924		1,666		3,680		3,341
Information technology (IT) services	2,127		2,010		4,296		4,150
C5ISR* solutions	1,089		995		2,161		2,018
Total Technologies	3,216		3,005		6,457		6,168
Total revenue	$	10,152	$	9,189	$	20,033	$	18,581

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

Revenue by contract type was as follows:

Three Months Ended July 2, 2023	Aerospace		Marine Systems		Combat Systems		Technologies		Total Revenue
Fixed-price	$	1,697	$	1,609	$	1,684	$	1,374	$	6,364
Cost-reimbursement	—		1,449		222		1,383		3,054
Time-and-materials	256		1		18		459		734
Total revenue	$	1,953	$	3,059	$	1,924	$	3,216	$	10,152
Three Months Ended July 3, 2022
Fixed-price	$	1,614	$	1,609	$	1,441	$	1,286	$	5,950
Cost-reimbursement	—		1,042		211		1,256		2,509
Time-and-materials	253		—		14		463		730
Total revenue	$	1,867	$	2,651	$	1,666	$	3,005	$	9,189
Six Months Ended July 2, 2023	Aerospace		Marine Systems		Combat Systems		Technologies		Total Revenue
Fixed-price	$	3,329	$	3,174	$	3,212	$	2,827	$	12,542
Cost-reimbursement	—		2,876		431		2,710		6,017
Time-and-materials	516		1		37		920		1,474
Total revenue	$	3,845	$	6,051	$	3,680	$	6,457	$	20,033
Six Months Ended July 3, 2022
Fixed-price	$	3,287	$	3,210	$	2,906	$	2,624	$	12,027
Cost-reimbursement	—		2,092		408		2,584		5,084
Time-and-materials	483		—		27		960		1,470
Total revenue	$	3,770	$	5,302	$	3,341	$	6,168	$	18,581

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. The amount for an incentive or award fee is 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 may 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, 2023	Aerospace		Marine Systems		Combat Systems		Technologies		Total Revenue
U.S. government:
Department of Defense (DoD)	$	54	$	3,029	$	941	$	1,867	$	5,891
Non-DoD	—		—		3		1,178		1,181
Foreign military sales (FMS)	21		29		159		10		219
Total U.S. government	75		3,058		1,103		3,055		7,291
U.S. commercial	985		1		55		48		1,089
Non-U.S. government	142		—		733		92		967
Non-U.S. commercial	751		—		33		21		805
Total revenue	$	1,953	$	3,059	$	1,924	$	3,216	$	10,152
Three Months Ended July 3, 2022
U.S. government:
DoD	$	80	$	2,620	$	940	$	1,667	$	5,307
Non-DoD	—		—		3		1,178		1,181
FMS	49		29		50		6		134
Total U.S. government	129		2,649		993		2,851		6,622
U.S. commercial	1,088		1		60		53		1,202
Non-U.S. government	179		1		590		93		863
Non-U.S. commercial	471		—		23		8		502
Total revenue	$	1,867	$	2,651	$	1,666	$	3,005	$	9,189
Six Months Ended July 2, 2023	Aerospace		Marine Systems		Combat Systems		Technologies		Total Revenue
U.S. government:
DoD	$	195	$	5,978	$	1,875	$	3,740	$	11,788
Non-DoD	—		1		5		2,370		2,376
FMS	39		70		292		19		420
Total U.S. government	234		6,049		2,172		6,129		14,584
U.S. commercial	2,183		1		106		102		2,392
Non-U.S. government	250		1		1,352		192		1,795
Non-U.S. commercial	1,178		—		50		34		1,262
Total revenue	$	3,845	$	6,051	$	3,680	$	6,457	$	20,033
Six Months Ended July 3, 2022
U.S. government:
DoD	$	160	$	5,225	$	1,795	$	3,418	$	10,598
Non-DoD	—		1		5		2,421		2,427
FMS	82		73		119		16		290
Total U.S. government	242		5,299		1,919		5,855		13,315
U.S. commercial	2,198		1		105		103		2,407
Non-U.S. government	299		2		1,275		195		1,771
Non-U.S. commercial	1,031		—		42		15		1,088
Total revenue	$	3,770	$	5,302	$	3,341	$	6,168	$	18,581

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 July 2, 2023, were not materially impacted by any other factors.

Revenue recognized for the three- and six-month periods ended July 2, 2023, and July 3, 2022, that was included in the contract liability balance at the beginning of each year was $949 and $2.7 billion, and $865 and $2.6 billion, respectively. This revenue represented primarily the sale of business jet aircraft.