Notes to Consolidated Financial Statements
Note
1
. Description of Company and Significant Accounting Policies
KBR, Inc., a Delaware corporation, was formed on March 21, 2006 and is headquartered in Houston, Texas. KBR, Inc. and its wholly owned and majority-owned subsidiaries (collectively referred to herein as "KBR", "the Company", "we", "us" or "our") is a global provider of differentiated, professional services and technologies across the asset and program life-cycle within the government services and hydrocarbons industries. Our capabilities include research and development, feasibility and solutions development, specialized technical consulting, systems integration, engineering and design service, process technologies, program management, construction services, commissioning and startup services, highly specialized mission and logistics support solutions, and asset operations and maintenance services and other support services to a diverse customer base, including government and military organizations of the U.S., U.K. and Australia and a wide range of customers across the hydrocarbons value chain.
Principles of Consolidation
Our consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of KBR and our wholly owned and majority-owned subsidiaries and VIEs of which we are the primary beneficiary. We account for investments over which we have significant influence but not a controlling financial interest using the equity method of accounting. See Note
12
to our consolidated financial statements for further discussion on our equity investments and VIEs. The cost method is used when we do not have the ability to exert significant influence. All material intercompany balances and transactions are eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to the current year presentation on the consolidated statements of operations, consolidated balance sheets and the consolidated statements of cash flows.
We have evaluated all events and transactions occurring after the balance sheet date but before the financial statements were issued and have included the appropriate disclosures. See Note 3 to our consolidated financial statements for subsequent events related to our acquisition of Stinger Ghaffarian Technologies, Inc. and Note 7 for the events related to our Aspire Defence project.
Use of Estimates
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas requiring significant estimates and assumptions by our management include the following:
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project revenues, costs and profits on engineering and construction contracts, including recognition of estimated losses on uncompleted contracts
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project revenues, award fees, costs and profits on government services contracts
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provisions for uncollectible receivables and client claims and recoveries of costs from subcontractors, vendors and others
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provisions for income taxes and related valuation allowances and tax uncertainties
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recoverability of goodwill
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recoverability of other intangibles and long-lived assets and related estimated lives
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recoverability of equity method and cost method investments
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valuation of pension obligations and pension assets
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accruals for estimated liabilities, including litigation accruals
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valuation of share-based compensation
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valuation of assets and liabilities acquired in business combinations
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In accordance with normal practice in the construction industry, we include in current assets and current liabilities amounts related to construction contracts realizable and payable over a period in excess of one year. If the underlying estimates and assumptions upon which the financial statements are based change in the future, actual amounts may differ from those included in the accompanying consolidated financial statements.
Cash and Equivalents
We consider highly liquid investments with an original maturity of three months or less to be cash equivalents. See Note
4
to our consolidated financial statements for our discussion on cash and equivalents.
Revenue Recognition
Government Contracts
Certain services provided to the United States ("U.S.") government are performed on cost-reimbursable contracts. Generally, these contracts may contain base fees (a fixed profit percentage applied to our estimates of costs to complete the work) and award fees (a variable profit percentage applied to definitized costs, which is subject to our customer's discretion and tied to specific performance measures defined in the contract, such as adherence to schedule, health and safety, quality of work, responsiveness, cost performance and business management).
Revenues are recognized at the time services are performed, and such revenues include base fees, actual direct project costs incurred and an allocation of indirect costs. Indirect costs are applied using rates approved by our government customers. The general, administrative and overhead cost reimbursement rates are estimated periodically in accordance with government contract accounting regulations and may change based on actual costs incurred or based upon the volume of work performed. Award fees are recognized when such fees are probable and estimable. Estimates of the total fee to be earned are made based on contract provisions, prior experience with similar contracts or clients and management’s evaluation of the performance on such contracts. Revenues are reduced for our estimate of costs that either are in dispute with our customer or have been identified as potentially unallowable pursuant to the terms of the contract or the federal acquisition regulations.
Engineering and Construction Contracts
Contracts.
Revenues from contracts to provide construction, engineering, design or similar services are recognized using the percentage-of-completion method of accounting in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 605 - Revenue Recognition. Depending on the type of job, progress is generally measured based upon costs incurred to date to total estimated costs at completion, man-hours expended to date to total man-hours estimated at completion or physical progress. Changes in total estimated contract costs and losses, if any, are provided for in the period they are determined. Claims and change orders that are in the process of negotiation with customers for additional work or changes in the scope of work are included in contract value when the value can be reliably estimated and the amount is probable of collection.
Our work is performed under three general types of contracts: fixed-price contracts, cost-reimbursable plus a fee or mark-up contracts and "hybrid" contracts containing cost-reimbursable and fixed-price scopes. All contract types may be modified by cost escalation provisions or other risk sharing mechanisms and incentive and penalty provisions. During the term of a project, the contract or components of the contract may be renegotiated to include characteristics of a different contract type. When we negotiate any type of contract, we frequently are required to accomplish the scope of work and meet certain performance criteria within a specified time frame; otherwise, we could be assessed damages, which in some cases are agreed-upon liquidated damages. We include an estimate of liquidated damages in our estimates as a reduction of total contract value when it is probable that they will be assessed. Profit is recorded based upon the product of estimated contract profit-at-completion times the current percentage-complete for the contract.
Fixed-price contracts, which include unit-rate contracts (essentially a fixed-price contract with the only variable being units of work performed), are for a fixed sum to cover all costs and any profit element for a defined scope of work. Fixed-price contracts entail significant risk to us because they require us to predetermine the work to be performed, the project execution schedule and the costs associated with the work. As a result, we may benefit or be penalized for cost variations from our original estimates. However, these contract prices may be adjusted for changes in scope of work, new or changing laws and regulations and other negotiated events.
Cost-reimbursable contracts include contracts where the price is variable based upon our actual costs incurred for time and materials. Profit on cost-reimbursable contracts may be a fixed amount, a mark-up applied to costs incurred or a combination of the two. Cost-reimbursable contracts are generally less risky than fixed-price contracts because the owner/customer retains many of the project risks.
Unapproved Change Orders and Claims.
Revenues and gross profit on contracts can be significantly affected by change orders and claims that may not be approved by the customer until the later stages of a contract or subsequent to the date a project is completed. If it is not probable that the costs will be recovered through a change in contract price, the costs attributable to unapproved change orders and claims are treated as contract costs without incremental revenue. For certain contracts where it is probable that the costs will be recovered through a change order or resolution of a claim, total estimated contract revenue is increased by the lesser of the amounts management expects to recover or the costs expected to be incurred.
When estimating the amount of total gross profit or loss on a contract, we include unapproved change orders or claims to our clients as adjustments to revenues. We include claims to vendors, subcontractors and others as adjustments to total estimated costs. If we have a reasonable legal basis and collectability of amounts are probable, claims against vendors, subcontractors and others are recorded up to the extent of the lesser of the amounts management expects to recover or to costs incurred and include no profit until such time as they are finalized and approved. See Note
7
to our consolidated financial statements for our discussion on unapproved change orders and claims.
Services Contracts
Revenues for our services contracts are recorded as the services are rendered and the amounts are deemed realized or realizable and earned. Revenues are recognized when persuasive evidence of a customer arrangement exists, delivery has occurred or services have been rendered, the price to the customer is fixed and determinable, and collection of revenues is reasonably assured. Revenues associated with incentive fees for these contracts are recognized when earned.
Gross Profit
Gross profit represents revenues less the cost of revenues, which includes business segment overhead costs directly attributable to execution of contracts by the business segment.
Contract Costs
Contract costs include all direct material and labor costs and those indirect costs related to contract performance. Indirect costs, included in cost of revenues, include charges for such items as facilities, engineering, project management, quality control, bids and proposals and procurement.
General and Administrative Expenses
Our general and administrative expenses represent expenses that are not associated with the execution of the contracts. General and administrative expenses include charges for such items as executive management, corporate business development, information technology, finance and accounting, human resources and various other corporate functions.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount based on contracted prices. Amounts collected on accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows.
We establish an allowance for doubtful accounts based on the assessment of the clients’ willingness and ability to pay. In addition to such allowances, there are often items in dispute or being negotiated that may require us to make an estimate as to the ultimate outcome. Past due receivable balances are written off when our internal collection efforts have been unsuccessful in collecting the amounts due. See Note
5
to our consolidated financial statements for our discussion on accounts receivable.
Retainage, included in accounts receivable, represents amounts withheld from billings by our clients pursuant to provisions in the contracts and may not be paid to us until the completion of specific tasks or the completion of the project and, in some instances, for even longer periods. Retainage may also be subject to restrictive conditions such as performance guarantees. Our retainage receivable excludes amounts withheld by the U.S. government on certain contracts. See Notes
8
and
16
to our consolidated financial statements for our discussion on U.S. government receivables.
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts, Including Claims, and Advanced Billings and Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts
Billing practices are governed by the contract terms of each project based upon costs incurred, achievement of milestones or pre-agreed schedules. Billings do not necessarily correlate with revenue recognized using the percentage-of-completion method of accounting. Costs and estimated earnings in excess of billings on uncompleted contracts ("CIE") represent the excess of contract costs and profits recognized to date using the percentage-of-completion method over billings to date on certain contracts. Billings in excess of costs and estimated earnings on uncompleted contracts ("BIE") represents the excess of billings to date over the amount of contract costs and profits recognized to date using the percentage-of-completion method on certain contracts. For service-type contracts, revenues recognized in excess of amounts billed to the customer are recorded in CIE and amounts billed to the customer in excess of revenues recognized to date are recorded in BIE. With the exception of claims and change orders that we are in the process of negotiating with customers, unbilled receivables are usually billed during normal billing processes following achievement of the contractual requirements. We anticipate that substantially all incurred costs associated with unbilled receivables as of December 31, 2017 will be billed and collected in 2018. See Note
6
to our consolidated financial statements for our discussion on CIE and BIE.
Property, Plant and Equipment
Property, plant and equipment are reported at cost less accumulated depreciation except for those assets that have been written down to their fair values due to impairment. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance and repairs are charged to expense as incurred. The cost of property, plant and equipment sold or otherwise disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in operating income for the respective period. Depreciation is generally provided on the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized using the straight-line method over the shorter of the useful life of the improvement or the lease term. See Note
9
to our consolidated financial statements for our discussion on property, plant and equipment.
Goodwill and Intangible Assets
Goodwill is an asset representing the excess cost over the fair market value of net assets acquired in business combinations. In accordance with ASC 350 - Intangibles - Goodwill and Other, goodwill is not amortized but is tested annually for impairment or on an interim basis when indicators of potential impairment exist. Goodwill is tested for impairment at the reporting unit level. Our reporting units are our operating segments or components of operating segments where discrete financial information is available and segment management regularly reviews the operating results. For purposes of impairment testing, goodwill is allocated to the applicable reporting units based on the current reporting structure. If the fair value of a reporting unit exceeds its carrying value, the goodwill of the reporting unit is not considered impaired. If the carrying value of a reporting unit exceeds its fair value, a second step of the goodwill impairment test is performed to measure the amount of goodwill impairment. The second step compares the implied fair value of the reporting unit goodwill to the carrying value of the reporting unit goodwill. We determine the implied fair value of the goodwill in the same manner as determining the amount of goodwill to be recognized in a business combination. We completed our annual goodwill impairment test in the fourth quarter of 2017 and determined that none of the goodwill was impaired. See Note
10
to our consolidated financial statements for reported goodwill in each of our segments.
We had intangible assets with a carrying value of
$239 million
and
$248 million
as of
December 31, 2017
and
2016
, respectively. Intangible assets with indefinite lives are not amortized but are subject to annual impairment tests or on an interim basis when indicators of potential impairment exist. An intangible asset with an indefinite life is impaired if its carrying value exceeds its fair value. As of
December 31, 2017
, none of our intangible assets with indefinite lives were impaired. Intangible assets with finite lives are amortized on a straight-line basis over the useful life of those assets, ranging from
1 year
to
25 years
. See Note
10
to our consolidated financial statements for further discussion of our intangible assets.
Investments
We account for non-marketable investments using the equity method of accounting if the investment gives us the ability to exercise significant influence over, but not control, of an investee. Significant influence generally exists if we have an ownership interest representing between 20% and 50% of the voting stock of the investee. Under the equity method of accounting, investments are stated at initial cost and are adjusted for subsequent additional investments and our proportionate share of earnings or losses and distributions.
Equity in earnings of unconsolidated affiliates, in the consolidated statements of operations, reflects our proportionate share of the investee's net income, including any associated affiliate taxes. Our proportionate share of the investee’s other comprehensive income (loss), net of income taxes, is recorded in the consolidated statements of shareholders’ equity and consolidated statements of comprehensive income (loss). In general, the equity investment in our unconsolidated affiliates is equal to our current equity investment plus those entities' undistributed earnings.
We evaluate our equity method investments for impairment at least annually or whenever events or changes in circumstances indicate, in management’s judgment, that the carrying value of an investment may have experienced an other-than-temporary decline in value. When evidence of loss in value has occurred, management compares the estimated fair value of the investment to the carrying value of the investment to determine whether an impairment has occurred. If the estimated fair value is less than the carrying value and management considers the decline in value to be other than temporary, the excess of the carrying value over the estimated fair value is recognized in the financial statements as an impairment. See Note
12
to our consolidated financial statements for our discussion on equity method investments.
Where we are unable to exercise significant influence over the investee, or when our investment balance is reduced to zero from our proportionate share of losses, the investments are accounted for under the cost method. Under the cost method, investments are carried at cost and adjusted only for other-than-temporary declines in fair value, distributions of earnings, or additional investments.
Variable Interest Entities
The majority of our joint ventures are VIEs. We account for VIEs in accordance with ASC 810 - Consolidation, which requires the consolidation of VIEs in which a company has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive the benefits from the VIE that could potentially be significant to the VIE. If a reporting enterprise meets these conditions then it has a controlling financial interest and is the primary beneficiary of the VIE. Our unconsolidated VIEs are accounted for under the equity method of accounting.
We assess all newly created entities and those with which we become involved to determine whether such entities are VIEs and, if so, whether or not we are their primary beneficiary. Most of the entities we assess are incorporated or unincorporated joint ventures formed by us and our partner(s) for the purpose of executing a project or program for a customer and are generally dissolved upon completion of the project or program. Many of our long-term energy-related construction projects are executed through such joint ventures. Typically, these joint ventures are funded by advances from the project owner, and accordingly, require little or no equity investment by the joint venture partners but may require subordinated financial support from the joint venture partners such as letters of credit, performance and financial guarantees or obligations to fund losses incurred by the joint venture. Other joint ventures, such as privately financed initiatives ("PFIs"), generally require the partners to invest equity and take an ownership position in an entity that manages and operates an asset after construction is complete.
As required by ASC 810 - Consolidation, we perform a qualitative assessment to determine whether we are the primary beneficiary once an entity is identified as a VIE. Thereafter, we continue to re-evaluate whether we are the primary beneficiary of the VIE in accordance with ASC 810 - Consolidation. A qualitative assessment begins with an understanding of the nature of the risks in the entity as well as the nature of the entity’s activities. These include the terms of the contracts entered into by the entity, ownership interests issued by the entity and how they were marketed and the parties involved in the design of the entity. We then identify all of the variable interests held by parties involved with the VIE including, among other things, equity investments, subordinated debt financing, letters of credit, financial and performance guarantees and contracted service providers. Once we identify the variable interests, we determine those activities which are most significant to the economic performance of the entity and which variable interest holder has the power to direct those activities. Though infrequent, some of our assessments reveal no primary beneficiary because the power to direct the most significant activities that impact the economic performance is held equally by two or more variable interest holders who are required to provide their consent prior to the execution of their decisions. Most of the VIEs with which we are involved have relatively few variable interests and are primarily related to our equity investment, significant service contracts and other subordinated financial support. See Note
12
to our consolidated financial statements for our discussion on variable interest entities.
In February 2015, the FASB issued Accounting Standards Update ("ASU") No. 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation Analysis. This ASU amended the consolidation guidance for VIEs as well as general partners’ investments in limited partnerships and modified the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities. The amendments were effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods. On January 1, 2016, we adopted ASU 2015-02. The adoption of this update did not have a material impact on our consolidated financial statements.
Acquisitions
We account for business combinations using the acquisition method of accounting in accordance with ASC 805 - Business Combinations, which allocates the fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. We conduct external and internal valuations of certain acquired assets and liabilities for inclusion in our balance sheet as of the date of acquisition. Initial purchase price allocations are subject to revisions within the measurement period, not to exceed one year from the date of acquisition. Acquisition-related expenses and transaction costs associated with business combinations are expensed as incurred.
Deconsolidation of a Subsidiary
We account for a gain or loss on deconsolidation of a subsidiary or derecognition of a group of assets in accordance with ASC 810-10-40-5. We measure the gain or loss as the difference between (a) the aggregate of all the following: (1) the fair value of any consideration received (2) the fair value of any retained noncontrolling investment in the former subsidiary or group of assets at the date the subsidiary is deconsolidated or the group of assets is derecognized and (3) the carrying amount of any noncontrolling interest in the former subsidiary (including any accumulated other comprehensive income attributable to the noncontrolling interest) at the date the subsidiary is deconsolidated and (b) the carrying amount of the former subsidiary’s assets and liabilities or the carrying amount of the group of assets.
Pensions
We account for our defined benefit pension plans in accordance with ASC 715 - Compensation - Retirement Benefits, which requires an employer to:
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recognize on its balance sheet the funded status (measured as the difference between the fair value of plan assets and the benefit obligation) of the pension plan;
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recognize, through comprehensive income, certain changes in the funded status of a defined benefit plan in the year in which the changes occur;
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measure plan assets and benefit obligations as of the end of the employer’s fiscal year; and
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disclose additional information.
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Our pension benefit obligations and expenses are calculated using actuarial models and methods. Two of the more critical assumptions and estimates used in the actuarial calculations are the discount rate for determining the current value of benefit obligations and the expected rate of return on plan assets. Other assumptions and estimates used in determining benefit obligations and plan expenses include inflation rates and demographic factors such as retirement age, mortality and turnover. These assumptions and estimates are evaluated periodically (typically annually) and are updated accordingly to reflect our actual experience and expectations.
The discount rate used to determine the benefit obligations was computed using a yield curve approach that matches plan specific cash flows to a spot rate yield curve based on high quality corporate bonds. The expected long-term rate of return on assets was determined by a stochastic projection that takes into account asset allocation strategies, historical long-term performance of individual asset classes, an analysis of additional return (net of fees) generated by active management, risks using standard deviations and correlations of returns among the asset classes that comprise the plans' asset mix. Plan assets are comprised primarily of equity securities, fixed income funds and securities, hedge funds, real estate and other funds. As we have both domestic and international plans, these assumptions differ based on varying factors specific to each particular country or economic environment.
Unrecognized actuarial gains and losses are generally recognized using the corridor method over a period of approximately
25 years
, which represents a reasonable systematic method for amortizing gains and losses for the employee group. Our unrecognized actuarial gains and losses arise from several factors, including experience and assumption changes in the obligations and the difference between expected returns and actual returns on plan assets. The difference between actual and expected returns is deferred as an unrecognized actuarial gain or loss on our consolidated statement of comprehensive income (loss) and is recognized as a decrease or an increase in future pension expense.
Income Taxes
We recognize the amount of taxes payable or refundable for the year and deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. We provide a valuation allowance for deferred tax assets if it is more likely than not that these items will not be realized. See Note
15
to our consolidated financial statements for our discussion on income taxes.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. A current tax asset or liability is recognized for the estimated taxes refundable or payable on tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. A valuation allowance is provided for deferred tax assets if it is more-likely-than-not that these items will not be realized. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and available tax planning strategies in making this assessment. Additionally, we use forecasts of certain tax elements such as taxable income and foreign tax credit utilization in making this assessment of realization. Given the inherent uncertainty involved with the use of such estimates and assumptions, there can be significant variation between estimated and actual results.
We have operations in numerous countries other than the United States. Consequently, we are subject to the jurisdiction of a significant number of taxing authorities. The income earned in these various jurisdictions is taxed on differing bases, including income actually earned, income deemed earned and revenue-based tax withholding. The final determination of our tax liabilities involves the interpretation of local tax laws, tax treaties and related authorities in each jurisdiction. Changes in the operating environment, including changes in tax law and currency/repatriation controls, could impact the determination of our tax liabilities for a tax year.
We recognize the effect of income tax positions only if it is more-likely-than-not that those positions will be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records potential interest and penalties related to unrecognized tax benefits in income tax expense.
Tax filings of our subsidiaries, unconsolidated affiliates and related entities are routinely examined by tax authorities in the normal course of business. These examinations may result in assessments of additional taxes, which we work to resolve with the tax authorities and through the judicial process. Predicting the outcome of disputed assessments involves some uncertainty. Factors such as the availability of settlement procedures, willingness of tax authorities to negotiate and the operation and impartiality of judicial systems vary across the different tax jurisdictions and may significantly influence the ultimate outcome. We review the facts for each assessment, and then utilize assumptions and estimates to determine the most likely outcome and provide taxes, interest and penalties as needed based on this outcome.
Derivative Instruments
We enter into derivative financial transactions to hedge existing or forecasted exposures to changing foreign currency exchange rates. We do not enter into derivative transactions for speculative or trading purposes. We recognize all derivatives at fair value on the balance sheet. Derivatives that are not designated as hedges in accordance with ASC 815 - Derivatives and Hedging, are adjusted to fair value and such changes are reflected in the results of operations. If the derivative is designated as a cash flow hedge under ASC 815, changes in the fair value of derivatives are recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of a designated hedge's change in fair value is recognized in earnings. See Note
23
to our consolidated financial statements for our discussion on derivative instruments.
Recognized gains or losses on derivatives entered into to manage project related foreign exchange risk are included in gross profit. Foreign currency gains and losses for hedges of non-project related foreign exchange risk are reported within "Other non-operating income" on our consolidated statements of operations.
Concentration of Credit Risk
Financial instruments which potentially subject our company to concentrations of credit risk consist principally of cash and cash equivalents, and trade receivables. Our cash is primarily held with major banks and financial institutions throughout the world. We believe the risk of any potential loss on deposits held in these institutions is minimal.
Contracts with clients usually contain standard provisions allowing the client to curtail or terminate contracts for convenience. Upon such a termination, we are generally entitled to recover costs incurred, settlement expenses and profit on work completed prior to termination and demobilization cost.
We have revenues and receivables from transactions with an external customer that amounts to 10% or more of our revenues (which are generally not collateralized). We generated significant revenues from transactions with the U.S. government within our GS business segment and within our E&C business segment from the Chevron Corporation ("Chevron"), primarily from a major liquefied natural gas ("LNG") project in Australia which is substantially complete. No other customers represented 10% or more of consolidated revenues in any of the periods presented.
The following tables present summarized data related to our transactions with the U.S. government and Chevron.
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Revenues from major customers:
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Years ended December 31,
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Dollars in millions
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2017
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2016
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2015
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U.S. government
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$
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1,914
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$
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1,090
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$
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378
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Chevron
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$
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56
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$
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105
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$
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523
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Percentages of revenues and accounts receivable from major customers:
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Years ended December 31,
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2017
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2016
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2015
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U.S. government revenues percentage
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46
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%
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26
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%
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7
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%
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U.S. government receivables percentage
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32
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%
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27
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%
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4
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%
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Chevron revenues percentage
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1
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%
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2
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%
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10
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%
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Chevron receivables percentage
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1
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%
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1
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%
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5
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%
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Noncontrolling interest
Noncontrolling interests represent the equity investments of the minority owners in our joint ventures and other subsidiary entities that we consolidate in our financial statements.
Foreign currency
Our reporting currency is the U.S. dollar. The functional currency of our non-U.S. subsidiaries is typically the currency of the primary environment in which they operate. Where the functional currency for a non-U.S. subsidiary is not the U.S. dollar, translation of all of the assets and liabilities (including long-term assets, such as goodwill) to U.S. dollars is based on exchange rates in effect at the balance sheet date. Translation of revenues and expenses to U.S. dollars is based on the average rate during the period and shareholders’ equity accounts are translated at historical rates. Translation gains or losses, net of income tax effects, are reported in "Accumulated other comprehensive loss" on our consolidated balance sheets.
Transaction gains and losses that arise from foreign currency exchange rate fluctuations on transactions denominated in a currency other than the functional currency are recognized in income each reporting period when these transactions are either settled or remeasured. Transaction gains and losses on intra-entity foreign currency transactions and balances including advances and demand notes payable, on which settlement is not planned or anticipated in the foreseeable future, are recorded in "Accumulated other comprehensive loss" on our consolidated balance sheets.
Share-based compensation
We account for share-based payments, including grants of employee stock options, restricted stock-based awards and performance cash units, in accordance with ASC 718 - Compensation-Stock Compensation, which requires that all share-based payments (to the extent that they are compensatory) be recognized as an expense in our consolidated statements of operations based on their fair values on the award date and the estimated number of shares we ultimately expect to vest. We recognize share-based compensation expense on a straight-line basis over the service period of the award, which is no greater than
5 years
. See Note
21
to our consolidated financial statements for our discussion on share-based compensation and incentive plans.
Commitments and Contingencies
We record liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
Additional Balance Sheet Information
The components of "Other current assets" on our consolidated balance sheets as of
December 31, 2017
and
2016
are presented below:
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December 31,
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Dollars in millions
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2017
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2016
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Prepaid expenses
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53
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56
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Value-added tax receivable
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11
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17
|
|
Other miscellaneous assets
|
29
|
|
|
30
|
|
Total other current assets
|
$
|
93
|
|
|
$
|
103
|
|
The components of "Other current liabilities" on our consolidated balance sheets as of
December 31, 2017
and
2016
are presented below:
|
|
|
|
|
|
|
|
|
|
December 31,
|
Dollars in millions
|
2017
|
|
2016
|
Reserve for estimated losses on uncompleted contracts (a)
|
$
|
15
|
|
|
$
|
63
|
|
Retainage payable
|
30
|
|
|
47
|
|
Income taxes payable
|
17
|
|
|
55
|
|
Restructuring reserves
|
9
|
|
|
30
|
|
Taxes payable not based on income
|
11
|
|
|
14
|
|
Value-added tax payable
|
13
|
|
|
16
|
|
Insurance payable
|
9
|
|
|
14
|
|
Dividend payable
|
11
|
|
|
12
|
|
Other miscellaneous liabilities
|
42
|
|
|
41
|
|
Total other current liabilities
|
$
|
157
|
|
|
$
|
292
|
|
|
|
(a)
|
See Note
2
to our consolidated financial statements for further discussion on significant reserves for estimated losses on uncompleted contracts.
|
Other Liabilities
Included in "Other liabilities" on our consolidated balance sheets as of
December 31, 2017
and
2016
is noncurrent deferred rent of
$99 million
and
$103 million
, respectively. Also included in "Other liabilities" is a payable to our former parent of
$5 million
and
$19 million
as of December 31, 2017 and 2016, respectively. See Note
15
to our consolidated financial statements for further discussion regarding amounts payable to our former parent.
Note
2
. Business Segment Information
We provide a wide range of professional services and the management of our business is heavily focused on major projects or programs within each of our reportable segments. At any given time, a relatively few number of projects, government programs and joint ventures represent a substantial part of our operations. Our reportable segments follow the same accounting policies as those described in Note
1
to our consolidated financial statements.
We are organized into
three
core business segments and
two
non-core business segments. Our three core business segments focus on our core strengths in technical services relating to government services, technology and consulting, and engineering and construction. Our two non-core business segments are our Non-strategic Business segment, which includes businesses we intend to exit upon completion of existing contracts because they are no longer a part of our future strategic focus, and "Other", which includes our corporate expenses and general and administrative expenses not allocated to the other business segments. Each business segment reflects a reportable segment led by a separate business segment president who reports directly to our chief operating decision maker ("CODM"). Our business segments are described below.
Government Services ("GS").
Our GS business segment provides full life-cycle support solutions to defense, space, aviation and other programs and missions for military and other government agencies in the U.S., U.K. and Australia. As program management integrator, KBR covers the full spectrum of defense, space, aviation and other government programs and missions from research and development; through systems engineering, test and evaluation, systems integration and program management; to operations support, maintenance and field logistics. Our acquisitions in 2016, as described in Note
3
to our consolidated financial statements, have been combined with our existing U.S. operations within this business segment and operate under the single "KBRwyle" brand.
Technology & Consulting ("T&C").
Our T&C business segment combines proprietary KBR technologies, knowledge-based services and our three specialist consulting brands, Granherne, Energo and GVA, under a single, customer-facing global business. This segment provides licensed technologies, know-how and consulting services across the hydrocarbons value chain, from wellhead to crude refining and through refining and petrochemicals to specialty chemicals production. In addition to sharing many of the same customers, these brands share the approach of early and continuous customer involvement to deliver an optimal solution to meet the customers' objectives through early planning and scope definition, advanced technologies, and project life-cycle support.
Engineering & Construction ("E&C").
Our E&C business segment provides comprehensive project and program delivery capability globally. Our key capabilities leverage our operational and technical excellence as a global provider of engineering, procurement and construction ("EPC") for onshore oil and gas; LNG/gas to liquids ("GTL"); oil refining; petrochemicals; chemicals; fertilizers; offshore oil and gas (shallow-water, deep-water and subsea); floating solutions ( floating production units ("FPUs"), floating production, storage and offshore ("FPSO"), floating liquefied natural gas ("FLNG") & floating storage and regasification unit ("FSRU")); and maintenance services (via the “Brown & Root Industrial Services” brand).
Non-strategic Business.
Our Non-strategic Business segment represents the operations or activities which we intend to exit upon completion of existing contracts. This segment also included businesses we exited upon sale to third parties during 2015. All Non-Strategic Business projects are substantially complete as of December 31, 2017. We continue to finalize project close-out activities and negotiate the settlement of claims and various other matters associated with these projects.
Other.
Our Other business segment includes our corporate expenses and general and administrative expenses not allocated to the business segments above and would include any future activities that do not individually meet the criteria for segment presentation.
Reportable segment performance is evaluated by our CODM using gross profit (loss) and equity in earnings of unconsolidated affiliates, which is defined as business segment revenues less the cost of revenues, and includes overhead directly attributable to the business segment.
The following table presents revenues, gross profit (loss), equity in earnings of unconsolidated affiliates, impairment of goodwill, asset impairment and restructuring charges, capital expenditures and depreciation and amortization by reporting segment.
Operations by Reportable Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
Dollars in millions
|
2017
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
Government Services
|
$
|
2,193
|
|
|
$
|
1,359
|
|
|
$
|
663
|
|
Technology & Consulting
|
326
|
|
|
347
|
|
|
324
|
|
Engineering & Construction
|
1,614
|
|
|
2,352
|
|
|
3,454
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
Subtotal
|
4,133
|
|
|
4,058
|
|
|
4,441
|
|
Non-strategic Business
|
38
|
|
|
210
|
|
|
655
|
|
Total
|
$
|
4,171
|
|
|
$
|
4,268
|
|
|
$
|
5,096
|
|
Gross profit (loss):
|
|
|
|
|
|
Government Services
|
$
|
155
|
|
|
$
|
137
|
|
|
$
|
(3
|
)
|
Technology & Consulting
|
79
|
|
|
73
|
|
|
77
|
|
Engineering & Construction
|
108
|
|
|
7
|
|
|
224
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
Subtotal
|
342
|
|
|
217
|
|
|
298
|
|
Non-strategic Business
|
—
|
|
|
(105
|
)
|
|
27
|
|
Total
|
$
|
342
|
|
|
$
|
112
|
|
|
$
|
325
|
|
Equity in earnings of unconsolidated affiliates:
|
|
|
|
|
|
Government Services
|
$
|
43
|
|
|
$
|
39
|
|
|
$
|
45
|
|
Technology & Consulting
|
—
|
|
|
—
|
|
|
—
|
|
Engineering & Construction
|
29
|
|
|
52
|
|
|
104
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
Subtotal
|
72
|
|
|
91
|
|
|
149
|
|
Non-strategic Business
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
72
|
|
|
$
|
91
|
|
|
$
|
149
|
|
Asset impairment and restructuring charges (Note 11):
|
|
|
|
|
|
Government Services
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
Technology & Consulting
|
—
|
|
|
(1
|
)
|
|
(10
|
)
|
Engineering & Construction
|
(6
|
)
|
|
(30
|
)
|
|
(34
|
)
|
Other
|
—
|
|
|
(7
|
)
|
|
(22
|
)
|
Subtotal
|
(6
|
)
|
|
(39
|
)
|
|
(66
|
)
|
Non-strategic Business
|
—
|
|
|
—
|
|
|
(4
|
)
|
Total
|
$
|
(6
|
)
|
|
$
|
(39
|
)
|
|
$
|
(70
|
)
|
Segment operating income (loss):
|
|
|
|
|
|
Government Services
|
$
|
173
|
|
|
$
|
152
|
|
|
$
|
37
|
|
Technology & Consulting
|
76
|
|
|
66
|
|
|
62
|
|
Engineering & Construction
|
110
|
|
|
4
|
|
|
295
|
|
Other
|
(93
|
)
|
|
(93
|
)
|
|
(140
|
)
|
Subtotal
|
266
|
|
|
129
|
|
|
254
|
|
Non-strategic Business
|
—
|
|
|
(101
|
)
|
|
56
|
|
Total
|
$
|
266
|
|
|
$
|
28
|
|
|
$
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
Dollars in millions
|
2017
|
|
2016
|
|
2015
|
Capital expenditures:
|
|
|
|
|
|
Government Services
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
—
|
|
Technology & Consulting
|
—
|
|
|
—
|
|
|
—
|
|
Engineering & Construction
|
2
|
|
|
5
|
|
|
6
|
|
Other
|
2
|
|
|
4
|
|
|
4
|
|
Subtotal
|
8
|
|
|
11
|
|
|
10
|
|
Non-strategic Business
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
8
|
|
|
$
|
11
|
|
|
$
|
10
|
|
Depreciation and amortization:
|
|
|
|
|
|
Government Services
|
$
|
27
|
|
|
$
|
16
|
|
|
$
|
6
|
|
Technology & Consulting
|
3
|
|
|
3
|
|
|
2
|
|
Engineering & Construction
|
10
|
|
|
16
|
|
|
17
|
|
Other
|
8
|
|
|
10
|
|
|
14
|
|
Subtotal
|
48
|
|
|
45
|
|
|
39
|
|
Non-strategic Business
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
48
|
|
|
$
|
45
|
|
|
$
|
39
|
|
Prior Period Adjustments
During the second quarter of 2017, we corrected cumulative errors resulting in an increase to "Equity in earnings of unconsolidated affiliates" and "Net income attributable to KBR" within our consolidated statements of operations of
$9 million
and
$11 million
, respectively. The errors in equity in earnings of unconsolidated affiliates primarily related to our accounting for derivatives in one of our unconsolidated VIEs in our GS segment from the first quarter of 2016 through the first quarter of 2017.
During the fourth quarter of 2016, we corrected a cumulative error related to contract cost estimates on an LNG project in Australia within our E&C business segment. The cumulative error occurred throughout the period beginning in 2009 and through the third quarter of 2016 and resulted in a
$13 million
reduction to revenues and gross profit on our consolidated statements of operations and a decrease to "CIE" on our consolidated balance sheets during the fourth quarter of 2016.
During the second quarter of 2015, we corrected a cumulative error related to transactions between unconsolidated affiliates associated with our Mexican offshore maintenance joint venture within our E&C business segment. The cumulative error occurred throughout the period beginning in 2007 and through the first quarter of 2015 and resulted in a
$15 million
increase to "equity in earnings of unconsolidated affiliates" on our consolidated statements of operations and an increase to "equity in and advances to unconsolidated affiliates" on our consolidated balance sheets during the second quarter of 2015.
We evaluated these cumulative errors on both a quantitative and qualitative basis under the guidance of ASC 250 - Accounting Changes and Error Corrections. We determined that the cumulative impact of the errors described above did not affect the trend of net income, cash flows or liquidity and therefore did not have a material impact to previously issued financial statements. Additionally, we determined that the cumulative impact of the errors did not have a material impact to our consolidated financial statements for the fiscal year ended December 31, 2017.
Changes in Project-related Estimates
There are many factors that may affect the accuracy of our cost estimates and ultimately our future profitability. These include, but are not limited to, the availability and costs of resources (such as labor, materials and equipment), productivity and weather, and for unit rate and construction service contracts, the availability and detail of customer supplied engineering drawings. With a portfolio of more than one thousand contracts, we generally realize both lower and higher than expected margins on projects in any given period. We recognize revisions of revenues and costs in the period in which the revisions are known. This may result in the recognition of costs before the recognition of related revenue recovery, if any.
Changes in project-related estimates by business segment, which significantly impacted operating income during the periods presented, are as follows:
Government Services
There were no significant changes in project-related estimates during the year ended
December 31, 2017
within our GS business segment.
During the year ended
December 31, 2016
, revenues, gross profit, and segment operating income included a favorable change in estimate of
$33 million
as a result of reaching a settlement with the U.S. government for reimbursement of previously expensed legal fees associated with the sodium dichromate litigation. See Note
16
to our consolidated financial statements for information related to the settlement with the U.S. government. Additionally in 2016, we recognized a
$15 million
favorable change to gross profit related to the approval of a change order on a road construction project in the Middle East. The change order resulted in an extension of the contract terms and increased the total contract value.
Engineering & Construction
During the year ended
December 31, 2017
, the PEMEX and PEP arbitration was settled (see Note 17 to our consolidated financial statements) which resulted in additional revenues and gross profit of
$35 million
during the year ended
December 31, 2017
.
We recognized changes to equity earnings as a result of various changes to estimates on the Ichthys LNG Project during the year ended
December 31, 2017
. See Notes
7
and
18
for a discussion of the matters impacting this project.
We recognized unfavorable changes in estimates of losses of
$114 million
and
$27 million
in
2016
and
2015
respectively, on an EPC ammonia project in the U.S. primarily due to unforeseen costs related to the mechanical failure of a vendor supplied compressor and pumps that occurred during commissioning as well as various mechanical issues encountered during start-up. These issues delayed completion of the project to October 2016, which resulted in increased costs and the recognition of contractual liquidated damages due to the client. Included in the reserve for estimated losses on uncompleted contracts, which is a component of "Other current liabilities" on our consolidated financial statements, is
$1 million
and
$3 million
as of
December 31, 2017
and
2016
, respectively, related to this project. The project completed performance testing and in October 2016, care, custody and control of the plant were transferred to the customer. Our estimates of revenues and costs at completion have been, and may continue to be, impacted by remaining punch list items and warranty obligations. Our estimated loss at completion as of
December 31, 2017
represents our best estimate based on current information. Actual results could differ from the estimates we have used to account for this project as of
December 31, 2017
.
During the year ended
December 31, 2016
, we recognized unfavorable changes in estimated losses of
$112 million
on a downstream EPC project in the U.S. resulting from significant weather delays and forecast construction productivity rates less than previously expected. These issues have delayed completion until 2018, which resulted in additional estimated costs to complete, which led to the loss described above. The EPC project is
89%
complete as of
December 31, 2017
. Included in the reserve for estimated losses on uncompleted contracts, which is a component of "Other current liabilities" on our consolidated financial statements, is
$9 million
and
$35 million
as of
December 31, 2017
and
2016
, respectively, related to this project. Our estimated loss at completion represents our best estimate based on current information. Actual results could differ from the estimates we have used to account for this project as of
December 31, 2017
.
During the years ended December 31,
2016
and
2015
, revenues, gross profit, and segment operating income include
$64 million
and
$17 million
, respectively, resulting from favorable changes in estimates to complete due to settlements on close out of a LNG project in Africa.
We recognized favorable changes in our estimates of losses of
$21 million
in
2015
on seven Canadian pipe fabrication and module assembly projects. The favorable changes to our estimate of losses on these projects in
2015
were primarily due to negotiated settlements with clients. All of these projects were completed in 2015.
Non-strategic Business
There were no significant changes in project-related estimates during the year ended
December 31, 2017
within our Non-strategic Business segment.
We recognized unfavorable changes in estimates of losses on a power project of
$117 million
and
$33 million
in
2016
and
2015
, respectively, primarily due to increases in forecasted costs to complete the project driven by subcontractor cost increases from poor subcontractor productivity, resulting schedule delays and changes in the project execution strategy. The project has completed performance testing and in April 2017, care, custody and control of the project were transferred to the customer. Included in the reserve for estimated losses on uncompleted contracts is
$2 million
and
$14 million
as of
December 31, 2017
and
2016
, respectively, related to this project.
During the year ended
December 31, 2015
, we recognized additional gross profit of
$57 million
related to favorable settlements and cost savings associated with the completion of a power project in the U.S. This power project was completed in 2015.
Balance Sheet Information by Reportable Segment
Within KBR, not all assets are associated with specific business segments. Those assets specific to business segments include receivables, inventories, certain identified property, plant and equipment, equity in and advances to related companies and goodwill. The remaining assets, such as cash and the remaining property, plant and equipment, are considered to be shared among the business segments and are therefore reported in "Other."
|
|
|
|
|
|
|
|
|
|
December 31,
|
Dollars in millions
|
2017
|
|
2016
|
Total assets:
|
|
|
|
Government Services
|
$
|
1,600
|
|
|
$
|
1,646
|
|
Technology & Consulting
|
247
|
|
|
219
|
|
Engineering & Construction
|
1,028
|
|
|
1,600
|
|
Other
|
792
|
|
|
666
|
|
Subtotal
|
3,667
|
|
|
4,131
|
|
Non-strategic Business
|
7
|
|
|
13
|
|
Total
|
$
|
3,674
|
|
|
$
|
4,144
|
|
Goodwill (Note 10):
|
|
|
|
Government Services
|
$
|
679
|
|
|
$
|
674
|
|
Technology & Consulting
|
56
|
|
|
52
|
|
Engineering & Construction
|
233
|
|
|
233
|
|
Other
|
—
|
|
|
—
|
|
Subtotal
|
968
|
|
|
959
|
|
Non-strategic Business
|
—
|
|
|
—
|
|
Total
|
$
|
968
|
|
|
$
|
959
|
|
Equity in and advances to related companies (Note 12):
|
|
|
|
Government Services
|
$
|
41
|
|
|
$
|
37
|
|
Technology & Consulting
|
—
|
|
|
—
|
|
Engineering & Construction
|
346
|
|
|
332
|
|
Other
|
—
|
|
|
—
|
|
Subtotal
|
387
|
|
|
369
|
|
Non-strategic Business
|
—
|
|
|
—
|
|
Total
|
$
|
387
|
|
|
$
|
369
|
|
Selected Geographic Information
Revenues by country are determined based on the location of services provided. Long-lived assets by country are determined based on the location of tangible assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
Dollars in millions
|
2017
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
United States
|
$
|
1,986
|
|
|
$
|
2,111
|
|
|
$
|
2,212
|
|
Middle East
|
911
|
|
|
849
|
|
|
786
|
|
Europe
|
480
|
|
|
498
|
|
|
495
|
|
Australia
|
334
|
|
|
376
|
|
|
836
|
|
Canada
|
224
|
|
|
145
|
|
|
185
|
|
Africa
|
46
|
|
|
111
|
|
|
164
|
|
Other Countries
|
190
|
|
|
178
|
|
|
418
|
|
Total
|
$
|
4,171
|
|
|
$
|
4,268
|
|
|
$
|
5,096
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Dollars in millions
|
2017
|
|
2016
|
Property, plant & equipment, net:
|
|
|
|
United States
|
$
|
60
|
|
|
$
|
70
|
|
United Kingdom
|
52
|
|
|
35
|
|
Other
|
18
|
|
|
40
|
|
Total
|
$
|
130
|
|
|
$
|
145
|
|
Note
3
. Acquisitions and Dispositions
Sigma Bravo Pty Ltd Acquisition
On November 20, 2017, we acquired
100%
of the outstanding common
shares of Sigma Bravo Pty Ltd ("Sigma Bravo"). Sigma Bravo provides software development, training, information management and technical support services as well as operational support to the Australian Defence Force.
The aggregate purchase price of the acquisition was
$9 million
. We recognized goodwill of
$1 million
arising from the acquisition, which relates primarily to customer relationships and future growth opportunities to expand services provided to the Australian Defence Force. None of the goodwill is deductible for income tax purposes. The final settlement of the working capital adjustment is expected in the first half of 2018. Accordingly, adjustments to the initial purchase accounting for the acquired net assets will likely be completed during the first half of 2018. This acquisition is reported within our Government Services business segment.
Honeywell Technology Solutions Inc. Acquisition
On September 16, 2016, we acquired
100%
of the outstanding common stock of Honeywell Technology Solutions Inc. ("HTSI") from Honeywell International Inc.
HTSI provides an array of mission-critical services and customized solutions throughout the world, primarily to U.S. government agencies. This acquisition provides KBR with complete life-cycle service capabilities, including high-end technical engineering and mission support, cyber security and logistics and equipment maintenance within our GS business segment.
The aggregate consideration paid for the acquisition was
$300 million
, less
$20 million
of initial working capital adjustments for net cash consideration of
$280 million
, all of which was funded by an advance on our Credit Agreement (as defined in Note
14
to our consolidated financial statements).
We initially recognized goodwill of
$131 million
arising from the acquisition, which relates primarily to growth opportunities based on a broader service offering of the combined operations, including HTSI's specialized technical services and KBR's logistical expertise as well as expected cost synergies. Approximately
$117 million
of the goodwill is deductible for income tax purposes. During the year ended December 31, 2017, we recorded an increase to goodwill of approximately
$3 million
primarily associated with final working capital settlement and the finalization of various immaterial contingencies. This acquisition is reported within our GS business segment.
Wyle Inc. ("Wyle") Acquisition
On July 1, 2016, we acquired
100%
of the equity interests of Wyle from its shareholders, including Court Square Capital Partners and certain officers of Wyle, pursuant to an agreement and plan of merger.
Wyle delivers an array of custom solutions for customers in the U.S. Department of Defense, NASA and other federal agencies. Wyle's expertise includes systems and sustainment engineering, program and acquisition management, life science research, space medical operations, information technology and the testing and evaluation of aircraft, advanced systems and networks. The acquisition combines KBR's strengths in international, large-scale government logistics and support operations with Wyle's specialized technical services, largely focused in the contiguous U.S.
The aggregate consideration paid for the acquisition was
$600 million
, including repayment of outstanding balances under Wyle's credit facility and other transaction expenses, plus
$23 million
of purchase price adjustments, which resulted in net cash consideration of
$623 million
. We funded the total cash paid with a
$400 million
advance on our Credit Agreement and available cash on-hand. See Note
14
to our consolidated financial statements for information related to our Credit Agreement.
We initially recognized goodwill of
$483 million
arising from the acquisition, which relates primarily to growth opportunities based on a broader service offering of the combined operations, including Wyle's differentiated technical capabilities and KBR's international program management and logistics expertise. Additionally, goodwill relates to the existence of Wyle's skilled employee base and other expected synergies of the combined operations. Approximately
$107 million
of the goodwill is deductible for income tax purposes. During the year ended December 31, 2017, we recorded an increase to goodwill of approximately
$1 million
primarily associated with final working capital settlement and the finalization of various immaterial contingencies. This acquisition is reported within our GS business segment.
The following supplemental pro forma consolidated results of operations assume that HTSI and Wyle had been acquired as of January 1, 2015. The supplemental pro forma financial information was prepared based on the historical financial information of HTSI and Wyle and has been adjusted to give effect to pro forma adjustments that are directly attributable to the transaction. The pro forma amounts reflect certain adjustments to amortization expense and interest expense associated with the portion of the purchase price funded by a
$700 million
advance on our Credit Agreement, and also reflect adjustments to the 2016 results to exclude acquisition related costs as they are nonrecurring and are directly attributable to the transaction.
The supplemental pro forma financial information presented below does not include any anticipated cost savings or expected realization of other synergies associated with the transaction. Accordingly, this supplemental pro forma financial information is presented for informational purposes only and is not necessarily indicative of what the actual results of operations of the combined company would have been had the acquisition occurred on January 1, 2015, nor is it indicative of future results of operations.
|
|
|
|
|
|
|
|
Years ended December 31,
|
Dollars in millions, except per share data
|
2016
|
|
2015
|
|
(Unaudited)
|
Revenue
|
5,129
|
|
|
6,599
|
|
Net income (loss) attributable to KBR
|
(23
|
)
|
|
248
|
|
Diluted earnings per share
|
(0.16
|
)
|
|
1.72
|
|
Chematur Subsidiaries Acquisition
On January 11, 2016, we acquired
100%
of the outstanding common stock of
three
subsidiaries of Connell Chemical Industry LLC (through its subsidiary, Chematur Technologies AB): Plinke GmbH ("Plinke"), Weatherly Inc., ("Weatherly") and Chematur Ecoplanning Oy ("Ecoplanning"). Plinke specializes in proprietary technology and specialist equipment for the purification and concentration of inorganic acids used or produced in hydrocarbon processing facilities. Weatherly provides nitric acid and ammonium nitrate proprietary technologies and services to the fertilizer market. Ecoplanning offers proprietary evaporation and crystallization technologies and specialist equipment for weak acid and base solutions. As a result of this acquisition, we can expand our technology and consulting solutions into new markets while leveraging KBR's global sales and EPC capabilities.
The aggregate consideration paid for the acquisition was
$25 million
, less
$2 million
of acquired cash and other adjustments resulting in net cash consideration of
$23 million
. The consideration paid included an escrow of
$5 million
that secures the indemnification obligations of the seller and other contingent obligations related to the operation of the business. The escrow was settled in 2017 with
$4 million
released to KBR and
$1 million
to the seller. The release to KBR was in excess of the assumed recovery, which resulted in
$2 million
of gross profit for the T&C business segment during the year ended
December 31, 2017
.
We recognized goodwill of
$24 million
arising from the acquisition, which relates primarily to future growth opportunities to extend the acquired technologies outside North America to new customers and in revamping units of the existing customer base globally.
None
of the goodwill is deductible for income tax purposes. This acquisition is reported within our T&C business segment.
Stinger Ghaffarian Technologies
In February 2018, we entered into a definitive agreement to acquire
100%
of the outstanding stock of Stinger Ghaffarian Technologies ("SGT"), a leading provider of high-value engineering, mission operations, scientific and IT software solution in the government services market. SGT has approximately
2,500
employees and is headquartered in Greenbelt, MD. The estimated purchase price is
$355 million
and the transaction is expected to close in the first half of 2018. The acquisition will become a KBRwyle company and expands our Government Services business in the U.S.
Dispositions
In December 2015, we finalized the sale of our Infrastructure Americas business to Stantec Consulting Services Inc. for net cash proceeds, including working capital adjustments, of
$18 million
. The sale of this business within our Non-strategic Business segment is consistent with our restructuring plans announced in December 2014. The disposition resulted in a pretax gain of
$7 million
and is subject to finalization of certain indemnification claims. The gain on this transaction is included under "Gain on disposition of assets" on our consolidated statements of operations.
In June 2015, we sold our Building Group subsidiary to a subsidiary of Pernix Group, Inc., for net cash proceeds, including working capital adjustments, of
$23 million
. The sale of the Building Group within our Non-strategic Business segment is consistent with our restructuring plans announced in December 2014. The disposition resulted in a pre-tax gain of
$28 million
and is included under "gain on disposition of assets" on our consolidated statements of operations.
Note
4
. Cash and Equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and equivalents include cash balances held by our wholly owned subsidiaries as well as cash held by joint ventures that we consolidate. Joint venture cash balances are limited to joint venture activities and are not available for other projects, general cash needs or distribution to us without approval of the board of directors of the respective joint ventures. We expect to use joint venture cash for project costs and distributions of earnings related to joint venture operations. However, some of the earnings distributions may be paid to other KBR entities where the cash can be used for general corporate needs.
The components of our cash and equivalents balance are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Dollars in millions
|
International (a)
|
|
Domestic (b)
|
|
Total
|
Operating cash and equivalents
|
$
|
112
|
|
|
$
|
124
|
|
|
$
|
236
|
|
Short-term investments (c)
|
82
|
|
|
60
|
|
|
142
|
|
Cash and equivalents held in joint ventures
|
59
|
|
|
2
|
|
|
61
|
|
Total
|
$
|
253
|
|
|
$
|
186
|
|
|
$
|
439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Dollars in millions
|
International (a)
|
|
Domestic (b)
|
|
Total
|
Operating cash and equivalents
|
$
|
163
|
|
|
$
|
242
|
|
|
$
|
405
|
|
Short-term investments (c)
|
68
|
|
|
7
|
|
|
75
|
|
Cash and equivalents held in joint ventures
|
50
|
|
|
6
|
|
|
56
|
|
Total
|
$
|
281
|
|
|
$
|
255
|
|
|
$
|
536
|
|
|
|
(a)
|
Includes deposits held in non-U.S. operating accounts
|
|
|
(b)
|
Includes U.S. dollar and foreign currency deposits held in operating accounts that constitute onshore cash for tax purposes but may reside either in the U.S. or in a foreign country
|
|
|
(c)
|
Includes time deposits, money market funds, and other highly liquid short-term investments.
|
Note
5
. Accounts Receivable
The components of our accounts receivable, net of allowance for doubtful accounts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Dollars in millions
|
Retainage
|
|
Trade & Other
|
|
Total
|
Government Services
|
$
|
6
|
|
|
$
|
189
|
|
|
$
|
195
|
|
Technology & Consulting
|
—
|
|
|
81
|
|
|
81
|
|
Engineering & Construction
|
53
|
|
|
177
|
|
|
230
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
Subtotal
|
59
|
|
|
447
|
|
|
506
|
|
Non-strategic Business
|
4
|
|
|
—
|
|
|
4
|
|
Total
|
$
|
63
|
|
|
$
|
447
|
|
|
$
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Dollars in millions
|
Retainage
|
|
Trade & Other
|
|
Total
|
Government Services
|
$
|
6
|
|
|
$
|
190
|
|
|
$
|
196
|
|
Technology & Consulting
|
—
|
|
|
52
|
|
|
52
|
|
Engineering & Construction
|
53
|
|
|
276
|
|
|
329
|
|
Other
|
—
|
|
|
3
|
|
|
3
|
|
Subtotal
|
59
|
|
|
521
|
|
|
580
|
|
Non-strategic Business
|
5
|
|
|
7
|
|
|
12
|
|
Total
|
$
|
64
|
|
|
$
|
528
|
|
|
$
|
592
|
|
Note
6
. Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts and Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts
Our CIE balances by business segment are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
Dollars in millions
|
2017
|
|
2016
|
Government Services
|
$
|
274
|
|
|
$
|
271
|
|
Technology & Consulting
|
45
|
|
|
30
|
|
Engineering & Construction
|
64
|
|
|
115
|
|
Subtotal
|
383
|
|
|
416
|
|
Non-strategic Business
|
—
|
|
|
—
|
|
Total
|
$
|
383
|
|
|
$
|
416
|
|
Our BIE balances by business segment are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
Dollars in millions
|
2017
|
|
2016
|
Government Services
|
$
|
85
|
|
|
$
|
76
|
|
Technology & Consulting
|
62
|
|
|
61
|
|
Engineering & Construction
|
213
|
|
|
388
|
|
Subtotal
|
360
|
|
|
525
|
|
Non-strategic Business
|
8
|
|
|
27
|
|
Total
|
$
|
368
|
|
|
$
|
552
|
|
Note
7
. Unapproved Change Orders, Claims and Estimated Recoveries of Claims Against Suppliers and Subcontractors
The amounts of unapproved change orders, claims and estimated recoveries of claims against suppliers and subcontractors included in determining the profit or loss on contracts are as follows:
|
|
|
|
|
|
|
|
|
Dollars in millions
|
2017
|
|
2016
|
Amounts included in project estimates-at-completion at January 1,
|
$
|
294
|
|
|
$
|
104
|
|
Additions
|
647
|
|
|
241
|
|
Approved change orders
|
(17
|
)
|
|
(51
|
)
|
Amounts included in project estimates-at-completion at December 31,
|
$
|
924
|
|
|
$
|
294
|
|
Amounts recorded in revenues on a percentage-of-completion basis at December 31,
|
$
|
826
|
|
|
$
|
241
|
|
As of
December 31, 2017
and 2016, most of the change orders, customer claims and estimated recoveries of claims against suppliers and subcontractors above relate to our proportionate share of unapproved change orders and claims associated with our
30%
ownership interest in the JKC JV ("JKC"), which has contracted to perform the engineering, procurement, supply, construction and commissioning of onshore LNG facilities for a client in Darwin, Australia (Ichthys LNG Project). The contract between JKC and its client is a hybrid contract containing both cost-reimbursable and fixed-price (including unit-rate) scopes. Our proportionate share of unapproved change orders, claims and estimated recoveries of claims against suppliers and subcontractors on the project increased by
$630 million
and
$199 million
for the years ended December 31, 2017 and 2016.
The additional costs associated with these change orders, customer claims and estimated recoveries of claims against suppliers and subcontractors have been included in determining profit at completion and have resulted in a reduction to our percentage of completion progress for the year ended December 31, 2017. Estimated recoveries associated with the additional change orders, customer claims, and claims against suppliers and subcontractors, which are less than the estimated additional costs, have also been included in determining estimated profit at completion. Further, there are additional claims we believe that
we or our joint venture is entitled to recover from our client related to additional project costs which have been excluded from estimated revenues and profit at completion as appropriate under U.S. GAAP.
It is anticipated that these commercial matters may not be resolved in the near term. Our current estimates for the above unapproved change orders, customer claims and estimated recoveries of claims against suppliers and subcontractors may prove inaccurate and could result in significant changes to the estimated revenue, costs and profits at completion on the underlying projects. Significant contingencies related to the Ichthys LNG Project are discussed further in Note
18
to our consolidated financial statements.
Liquidated damages
Some of our engineering and construction contracts have schedule dates and performance obligations that if not met could subject us to penalties for liquidated damages. These generally relate to specified activities that must be completed by a set contractual date or by achievement of a specified level of output or throughput. Each contract defines the conditions under which a customer may make a claim for liquidated damages. However, in some instances, liquidated damages are not asserted by the customer, but the potential to do so is used in negotiating or settling claims and closing out the contract. Accrued liquidated damages are recognized as a reduction in revenues in our consolidated statements of operations.
In addition to the accrued liquidated damages, it is possible that liquidated damages related to several projects totaling
$9 million
at
December 31, 2017
and
$8 million
at
December 31, 2016
could be incurred if the projects are completed as currently forecasted. However, based upon our evaluation of our performance, we have concluded these liquidated damages are not probable and therefore, they have not been recognized.
Note
8
. Claims and Accounts Receivable
Our claims and accounts receivable balance not expected to be collected within the next 12 months was
$101 million
and
$131 million
as of December 31, 2017 and 2016, respectively. Claims and accounts receivable primarily reflects claims filed with the U.S. government related to payments not yet received for costs incurred under various U.S. government contracts within our GS business segment. These claims relate to disputed costs or contracts where our costs have exceeded the U.S. government's funded value on the task order. Included in the amount is
$79 million
and
$83 million
as of
December 31, 2017
and
2016
, related to Form 1s issued by the U.S. government questioning or objecting to costs billed to them. See Note
16
of our consolidated financial statements for additional discussions. The amount also includes
$22 million
and
$48 million
as of
December 31, 2017
and
2016
, respectively, related to contracts where our costs have exceeded the U.S. government's funded values on the underlying task orders or task orders where the U.S. government has not authorized us to bill. We believe the remaining disputed costs will be resolved in our favor, at which time the U.S. government will be required to obligate funds from appropriations for the year in which resolutions occurs.
Note
9
. Property, Plant and Equipment
The components of our property, plant and equipment balance are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful
Lives in Years
|
|
December 31,
|
Dollars in millions
|
|
2017
|
|
2016
|
Land
|
N/A
|
|
$
|
7
|
|
|
$
|
7
|
|
Buildings and property improvements
|
1 - 35
|
|
118
|
|
|
124
|
|
Equipment and other
|
1 - 25
|
|
334
|
|
|
338
|
|
Total
|
|
|
459
|
|
|
469
|
|
Less accumulated depreciation
|
|
|
(329
|
)
|
|
(324
|
)
|
Net property, plant and equipment
|
|
|
$
|
130
|
|
|
$
|
145
|
|
See Note
11
to our consolidated financial statements for discussion on asset impairment.
In the fourth quarter of 2015, we closed on the sale of our office facility located in Greenford, U.K. for approximately
$33 million
in net cash proceeds. The sale resulted in a pre-tax gain of
$23 million
on disposition of assets on our consolidated statements of operations. We also closed on the sale of our office facility located in Birmingham, Alabama for approximately
$6 million
in net cash proceeds. The gain on these transactions is included under "Gain on disposition of assets" on our consolidated statements of operations.
Depreciation expense was
$27 million
,
$31 million
and
$35 million
for the years ended December 31,
2017
,
2016
and
2015
, respectively.
Note
10
. Goodwill and Intangible Assets
Goodwill
The table below summarizes changes in the carrying amount of goodwill by business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
Government Services
|
|
Technology & Consulting
|
|
Engineering & Construction
|
|
Other
|
|
Subtotal
|
|
Non-strategic Business
|
|
Total
|
Balance as of January 1, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill
|
$
|
60
|
|
|
$
|
31
|
|
|
$
|
526
|
|
|
$
|
—
|
|
|
$
|
617
|
|
|
$
|
331
|
|
|
$
|
948
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
(293
|
)
|
|
—
|
|
|
(293
|
)
|
|
(331
|
)
|
|
(624
|
)
|
Net goodwill as of January 1, 2016
|
$
|
60
|
|
|
$
|
31
|
|
|
$
|
233
|
|
|
$
|
—
|
|
|
$
|
324
|
|
|
$
|
—
|
|
|
$
|
324
|
|
Goodwill acquired during the period
|
$
|
614
|
|
|
$
|
24
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
638
|
|
|
$
|
—
|
|
|
$
|
638
|
|
Impairment loss
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency translation
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill
|
$
|
674
|
|
|
$
|
52
|
|
|
$
|
526
|
|
|
$
|
—
|
|
|
$
|
1,252
|
|
|
$
|
331
|
|
|
$
|
1,583
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
(293
|
)
|
|
—
|
|
|
(293
|
)
|
|
(331
|
)
|
|
(624
|
)
|
Net goodwill as of December 31, 2016
|
$
|
674
|
|
|
$
|
52
|
|
|
$
|
233
|
|
|
$
|
—
|
|
|
$
|
959
|
|
|
$
|
—
|
|
|
$
|
959
|
|
Goodwill acquired during the period
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Purchase price adjustment
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
Impairment loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency translation
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill
|
$
|
679
|
|
|
$
|
56
|
|
|
$
|
526
|
|
|
$
|
—
|
|
|
$
|
1,261
|
|
|
$
|
331
|
|
|
$
|
1,592
|
|
Accumulated impairment losses
|
—
|
|
|
—
|
|
|
(293
|
)
|
|
—
|
|
|
(293
|
)
|
|
(331
|
)
|
|
(624
|
)
|
Net goodwill as of December 31, 2017
|
$
|
679
|
|
|
$
|
56
|
|
|
$
|
233
|
|
|
$
|
—
|
|
|
$
|
968
|
|
|
$
|
—
|
|
|
$
|
968
|
|
Intangible Assets
Intangible assets are comprised of customer relationships, trade names, licensing agreements and other. The cost and accumulated amortization of our intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
December 31, 2017
|
|
Weighted Average Remaining Useful Lives
|
|
Intangible Assets, Gross
|
|
Accumulated Amortization
|
|
Intangible Assets, Net
|
Trademarks/trade names
|
Indefinite
|
|
$
|
61
|
|
|
$
|
—
|
|
|
$
|
61
|
|
Customer relationships
|
17
|
|
206
|
|
|
(57
|
)
|
|
149
|
|
Developed technologies
|
17
|
|
45
|
|
|
(33
|
)
|
|
12
|
|
Other
|
13
|
|
49
|
|
|
(32
|
)
|
|
17
|
|
Total intangible assets
|
|
|
$
|
361
|
|
|
$
|
(122
|
)
|
|
$
|
239
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Weighted Average Remaining Useful Lives
|
|
Intangible Assets, Gross
|
|
Accumulated Amortization
|
|
Intangible Assets, Net
|
Trademarks/trade names
|
Indefinite
|
|
$
|
60
|
|
|
$
|
—
|
|
|
$
|
60
|
|
Customer relationships
|
18
|
|
199
|
|
|
(47
|
)
|
|
152
|
|
Developed technologies
|
17
|
|
46
|
|
|
(33
|
)
|
|
13
|
|
Other
|
9
|
|
43
|
|
|
(20
|
)
|
|
23
|
|
Total intangible assets
|
|
|
$
|
348
|
|
|
$
|
(100
|
)
|
|
$
|
248
|
|
Intangibles that are not subject to amortization are reviewed annually for impairment or more often if events or circumstances change that would create a triggering event. Intangibles subject to amortization are impaired if the carrying value of the intangible is not recoverable and exceeds its fair value. See Note
3
to our consolidated financial statements for discussion on additions of intangible assets.
Our intangibles amortization expense is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
Dollars in millions
|
2017
|
|
2016
|
|
2015
|
Intangibles amortization expense
|
$
|
21
|
|
|
$
|
14
|
|
|
$
|
4
|
|
Our expected intangibles amortization expense for the next five years is presented below:
|
|
|
|
|
Dollars in millions
|
Expected future
intangibles
amortization expense
|
2018
|
$
|
14
|
|
2019
|
$
|
14
|
|
2020
|
$
|
14
|
|
2021
|
$
|
10
|
|
2022
|
$
|
9
|
|
Beyond 2022
|
$
|
117
|
|
Note
11
. Asset Impairment and Restructuring
Information related to "Asset impairment and restructuring charges" on our consolidated statements of operations is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
Dollars in millions
|
2017
|
|
2016
|
|
2015
|
Asset impairment:
|
|
|
|
|
|
Government Services
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Technology & Consulting
|
—
|
|
|
—
|
|
|
—
|
|
Engineering & Construction
|
—
|
|
|
10
|
|
|
8
|
|
Other
|
—
|
|
|
7
|
|
|
21
|
|
Subtotal
|
—
|
|
|
17
|
|
|
29
|
|
Non-strategic Business
|
—
|
|
|
—
|
|
|
2
|
|
Total
|
$
|
—
|
|
|
$
|
17
|
|
|
$
|
31
|
|
Restructuring charges:
|
|
|
|
|
|
Government Services
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Technology & Consulting
|
—
|
|
|
1
|
|
|
10
|
|
Engineering & Construction
|
6
|
|
|
20
|
|
|
26
|
|
Other
|
—
|
|
|
—
|
|
|
1
|
|
Subtotal
|
6
|
|
|
22
|
|
|
37
|
|
Non-strategic Business
|
—
|
|
|
—
|
|
|
2
|
|
Total
|
$
|
6
|
|
|
$
|
22
|
|
|
$
|
39
|
|
Asset impairment and restructuring charges:
|
|
|
|
|
|
Total
|
$
|
6
|
|
|
$
|
39
|
|
|
$
|
70
|
|
Asset impairment charges include the following:
Enterprise resource planning project
- In December 2014, we decided to abandon further implementation of our enterprise resource planning ("ERP") project which began in 2013. During 2015, we recorded an additional
$5 million
within our E&C business segment and
$17 million
within our Other business segment resulting from our decision to abandon the remaining portion of this ERP project.
Intangible assets
-
No
intangibles were considered impaired during
2017
,
2016
and
2015
.
Leasehold improvements
- There were
no
impairments of leasehold improvements during
2017
. During
2016
and
2015
we recorded
$17 million
, and
$9 million
, respectively, primarily within our E&C and Other business segments related to asset impairments on abandoned office space.
Restructuring charges include the following:
Early Termination of leases -
During
2017
,
2016
and
2015
we recorded additional charges of
$7 million
,
$4 million
and
$12 million
, respectively, on early lease terminations within our E&C and Other business segments.
Severance
- During the year ended
December 31, 2017
we reversed
$1 million
of restructuring charges primarily related to the finalization of amounts owed to expatriate employees for tax equalization matters. We recognized severance charges of
$18 million
and
$27 million
during each of the twelve months ended
December 31, 2016
and
2015
, respectively, associated with workforce reductions.
Severance Accrual
In connection with our long-term strategic reorganization, we announced that beginning in the fourth quarter of 2014 we would undertake a restructuring, which would include actions such as reducing the amount of real estate we utilized and significantly reducing our workforce. There were additional actions undertaken in 2015 and 2016, including staff reductions to support current business levels. The table below provides a rollforward of one-time charges associated with employee terminations based on the fair value of the termination benefits. These amounts are included in "Other current liabilities" on our consolidated balance sheets.
|
|
|
|
|
Dollars in millions
|
Severance Accrual
|
Balance at December 31, 2015
|
$
|
19
|
|
Charges
|
18
|
|
Payments
|
(29
|
)
|
Balance at December 31, 2016
|
$
|
8
|
|
Charges
|
—
|
|
Payments
|
(6
|
)
|
Non-cash settlements (a)
|
$
|
(1
|
)
|
Balance at December 31, 2017
|
$
|
1
|
|
|
|
(a)
|
Includes the finalization of amounts owed to expatriate employees for tax equalization matters
|
Note
12
. Equity Method Investments and Variable Interest Entities
We conduct some of our operations through joint ventures which operate as partnerships, corporations, undivided interests and other business forms and are principally accounted for using the equity method of accounting. Additionally, the majority of our joint ventures are VIEs.
The following table presents a rollforward of our equity in and advances to unconsolidated affiliates:
|
|
|
|
|
|
|
|
|
Dollars in millions
|
2017
|
|
2016
|
Balance at January 1,
|
$
|
369
|
|
|
$
|
281
|
|
Equity in earnings of unconsolidated affiliates
|
72
|
|
|
91
|
|
Distributions of earnings of unconsolidated affiliates (a)
|
(62
|
)
|
|
(56
|
)
|
Advances (receipts)
|
(11
|
)
|
|
1
|
|
Investments (b)
|
—
|
|
|
61
|
|
Foreign currency translation adjustments
|
12
|
|
|
(8
|
)
|
Other
|
5
|
|
|
(8
|
)
|
Balance before reclassification
|
385
|
|
|
362
|
|
Reclassification of excess distributions (a)
|
11
|
|
|
12
|
|
Recognition of excess distributions (a)
|
(9
|
)
|
|
(5
|
)
|
Balance at December 31,
|
$
|
387
|
|
|
$
|
369
|
|
|
|
(a)
|
We received cash dividends in excess of the carrying value of one of our investments. We have no obligation to return any portion of the cash dividends received. We recorded the excess dividend amount as "Deferred income from unconsolidated affiliates" on our consolidated balance sheets and recognize these dividends as earnings are generated by the investment.
|
|
|
(b)
|
In 2016, investments included a
$56 million
investment in the Brown & Root Industrial Services joint venture and a
$5 million
investment in EPIC Piping LLC ("EPIC") joint venture.
|
Equity Method Investments
In February 2016, Affinity Flying Training Services Ltd. ("Affinity"), a joint venture between KBR and Elbit Systems, was awarded a service contract by a third party to procure, operate and maintain aircraft and aircraft-related assets over an
18
-year contract period, in support of the U.K. Military Flying Training System ("UKMFTS") project. The contract has been determined to contain a leasing arrangement and various other services between the joint venture and the customer. KBR owns a
50%
interest in Affinity.
In addition,
KBR owns a
50%
interest in the two joint ventures, Affinity Capital Works and Affinity Flying Services, which provide procurement, operations and management support services under subcontracts with Affinity. The remaining 50% interest in these entities is held by Elbit Systems. KBR has provided its proportionate share of certain limited financial and performance guarantees in support of the partners' contractual obligations. The three project-related entities are VIEs; however, KBR is not the primary beneficiary of any of these entities. We account for KBR's interests in each entity using the equity method of accounting within our GS business segment. The project is funded through KBR and Elbit Systems provided equity, subordinated debt and non-recourse third party commercial bank debt. During the first quarter of 2016, under the terms of the subordinated debt agreement between the partners and Affinity, we advanced our proportionate share, or
$14 million
, to meet initial working capital needs of the venture. We expect repayment on the advance and the associated interest over the term of the project. The amount is included in the "Equity in and advances to unconsolidated affiliates" balance on our consolidated balance sheets as of December 31, 2016 and in "(advances to) payments from unconsolidated affiliates, net" in our consolidated statement of cash flows for the twelve months ended December 31, 2016.
On September 30, 2015, we executed an agreement with Bernhard Capital Partners ("BCP"), a private equity firm, to establish the Brown & Root Industrial Services joint venture in North America. In connection with the formation of the joint venture, we contributed our Industrial Services Americas business and received cash consideration of
$48 million
and a
50%
interest in the joint venture. As a result of the transaction, we no longer have a controlling interest in this Industrial Services business and have deconsolidated it effective September 30, 2015. The transaction resulted in a pre-tax gain of
$7 million
, which is included in "Gain on disposition of assets" on our consolidated statements of operations. The fair value of our retained interest in the former business was determined using both a market approach and an income approach. Cash consideration was the primary input used for the market approach.
The Brown & Root Industrial Services joint venture will continue to offer services similar or related to those offered when the business was 100% owned by KBR. Our interest in this venture is accounted for using the equity method and we have determined that the Brown & Root Industrial Services joint venture is not a VIE. Our continuing involvement in the joint venture will be through our 50% voting interest and representation on the board of managers. Consistent with our other equity investments, transactions between us and the joint venture, if any, are deemed related party transactions. In connection with this transaction, we entered into an agreement effective October 1, 2015 to provide specified transition services to the new joint venture over a limited duration. See the Related Party discussion below for details on amounts related to this agreement.
On September 30, 2015, we acquired a minority interest in a partnership that owns a pipe fabrication business operating under the name EPIC and a minority interest in its general partner. BCP holds a controlling interest in these entities. Consideration for these interests was
$19 million
in cash and contribution of the majority of our Canada pipe fabrication and module assembly business excluding the seven completed loss projects. We have determined that this arrangement is not a VIE and we will account for our ownership interest using the equity method. In addition, we entered into an alliance agreement with EPIC to provide certain pipe fabrication services to KBR.
Mantenimiento Marino de Mexico, S. de R.L. de C.V. ("MMM").
MMM is a joint venture formed under a partnership agreement related to services performed for PEMEX. We determined that MMM is not a VIE. The MMM joint venture was set up under Mexican maritime law in order to hold navigation permits to operate in Mexican waters. The scope of the business is to render services for maintenance, repair and restoration of offshore oil and gas platforms and provisions of quartering in the territorial waters of Mexico. KBR holds a
50%
interest in the MMM joint venture. Results from MMM are included in our E&C business segment.
Summarized financial information
Summarized financial information for all jointly owned operations including VIEs that are accounted for using the equity method of accounting is as follows:
Balance Sheets
|
|
|
|
|
|
|
|
|
|
December 31,
|
Dollars in millions
|
2017
|
|
2016
|
Current assets
|
$
|
3,107
|
|
|
$
|
2,655
|
|
Noncurrent assets
|
3,250
|
|
|
3,003
|
|
Total assets
|
$
|
6,357
|
|
|
$
|
5,658
|
|
|
|
|
|
Current liabilities
|
$
|
2,006
|
|
|
$
|
1,657
|
|
Noncurrent liabilities
|
3,508
|
|
|
3,148
|
|
Total liabilities
|
$
|
5,514
|
|
|
$
|
4,805
|
|
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
Dollars in millions
|
2017
|
|
2016
|
|
2015
|
Revenues
|
$
|
5,781
|
|
|
$
|
5,877
|
|
|
$
|
5,245
|
|
Operating income
|
$
|
278
|
|
|
$
|
365
|
|
|
$
|
635
|
|
Net income
|
$
|
145
|
|
|
$
|
192
|
|
|
$
|
476
|
|
Unconsolidated Variable Interest Entities
The following summarizes the total assets and total liabilities as reflected in our consolidated balance sheets as well as our maximum exposure to losses related to our unconsolidated VIEs in which we have a significant variable interest but are not the primary beneficiary. Generally, our maximum exposure to loss includes our equity investment in the joint venture and any amounts payable to us for services we provided to the joint venture, reduced for any unearned revenues on the projects. Our projections do not indicate any estimated losses related to these projects. If a project becomes a loss project in the future, our maximum exposure to loss could increase to the extent we are required to fund those losses through capital contributions or working capital advances resulting from our guarantees or other commitments. Where our performance and financial obligations are joint and several to the client with our joint venture partners, we may be further exposed to losses above our ownership interest in the joint venture.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Dollars in millions
|
Total Assets
|
|
Total Liabilities
|
|
Maximum
Exposure to
Loss
|
Affinity project
|
$
|
26
|
|
|
$
|
10
|
|
|
$
|
26
|
|
Aspire Defence project
|
$
|
10
|
|
|
$
|
125
|
|
|
$
|
10
|
|
Ichthys LNG project (see Notes 7 and 18)
|
$
|
145
|
|
|
$
|
25
|
|
|
$
|
145
|
|
U.K. Road projects
|
$
|
36
|
|
|
$
|
10
|
|
|
$
|
36
|
|
EBIC Ammonia plant (65% interest)
|
$
|
38
|
|
|
$
|
1
|
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
December 31, 2016
|
Total Assets
|
|
Total Liabilities
|
|
Maximum
Exposure to
Loss
|
Affinity project
|
$
|
12
|
|
|
$
|
3
|
|
|
$
|
12
|
|
Aspire Defence project
|
$
|
14
|
|
|
$
|
107
|
|
|
$
|
14
|
|
Ichthys LNG project (see Notes 7 and 18)
|
$
|
124
|
|
|
$
|
33
|
|
|
$
|
124
|
|
U.K. Road projects
|
$
|
30
|
|
|
$
|
9
|
|
|
$
|
30
|
|
EBIC Ammonia plant (65% interest)
|
$
|
34
|
|
|
$
|
2
|
|
|
$
|
22
|
|
Aspire Defence project.
In April 2006, Aspire Defence, a joint venture between KBR and two other project sponsors, was awarded a privately financed project contract by the U.K. Ministry of Defence ("MoD") to upgrade and provide a range of services to the British Army’s garrisons at Aldershot and around Salisbury Plain in the U.K. In addition to a package of ongoing services to be delivered over
35 years
, the project included a
nine
-year construction program to improve soldiers’ single living, technical and administrative accommodations, along with leisure and recreational facilities. The initial construction program was completed in 2014. Aspire Defence manages the existing properties and is responsible for design, refurbishment, construction and integration of new and modernized facilities. We indirectly own a
45%
interest in Aspire Defence, the project company that is the holder of the 35-year concession contract. In addition, we own a
50%
interest in each of two unincorporated joint ventures that provide the construction and the related support services under subcontract arrangements with Aspire Defence. Our financial and performance guarantees are joint and several, subject to certain limitations, with our joint venture partner in these two subcontractor joint ventures. The project is funded through equity and subordinated debt provided by the project sponsors and the issuance of publicly-held senior bonds which are nonrecourse to KBR and the other project sponsors. The project company and the two subcontractor joint ventures in which we hold an interest are VIEs; however, we are not the primary beneficiary of these entities as of December 31, 2017 and 2016. We account for our interests in each of the entities using the equity method of accounting. As of
December 31, 2017
, included in our GS segment, our assets and liabilities associated with our investment in this project, within our consolidated balance sheets, were
$10 million
and
$125 million
, respectively. Our maximum exposure to loss of
$10 million
indicated in the table above includes our equity investments in the project entities and amounts payable to us for services provided to these entities as of
December 31, 2017
. Our maximum exposure to construction and operating joint venture losses is limited to our proportionate share of any amounts required to fund future losses incurred by those entities under their respective contracts with the project company. Our projections do not indicate any project losses for these joint ventures.
On January 15, 2018, Carillion plc, our U.K. partner in the two unincorporated joint ventures that provide the construction and related support services as subcontractors to Aspire Defence, initiated insolvency proceedings as a result of Carillion's deteriorating financial condition. Carillion no longer performs any of the services for the project as we have stepped in to deliver both construction and support services without disruption. As a result of Carillion's insolvency and in accordance with the
commercial arrangements of the project company and its lenders, Carillion was excluded from future business and benefit from its interest in the project and we have assumed operational management of the subcontracting joint ventures. We are currently negotiating with Carillion’s insolvency liquidator to acquire Carillion’s interests in these entities. An acquisition of Carillion’s interest and ultimate control of these entities are subject to further approvals by Aspire Defence, the Aspire Defence project lenders and the MoD.
We are currently evaluating our rights and obligations under the joint venture agreements and other commercial arrangements of the project company and its lenders, which could result in our consolidation of the entities that comprise the Aspire Defence joint venture that are currently accounting for under the equity method. As of December 31, 2017, total assets of the Aspire Defense project were approximately
$2.1 billion
primarily including cash, accounts receivable and contract intangibles associated with the 35-year concession contract and total liabilities were approximately
$2.3 billion
primarily due to long-term debt and other liabilities. As noted above, the project was primarily funded through the issuance of senior debt which is and would continue to be nonrecourse to KBR and the other project sponsors.
Ichthys LNG project.
In January 2012, we formed a joint venture to provide EPC services to construct the Ichthys Onshore LNG Export Facility in Darwin, Australia ("Ichthys LNG project"). The project is being executed through
two
joint ventures, which are VIEs, in which we own a
30%
equity interest. We account for our investments using the equity method of accounting. At
December 31, 2017
, our assets and liabilities associated with our investment in this project recorded in our consolidated balance sheets under our E&C business segment were
$145 million
and
$25 million
, respectively. Our maximum exposure to loss of
$145 million
indicated in the table above includes our equity investments in the joint ventures and amounts payable to us for services provided to the entity as of
December 31, 2017
. If the project becomes a loss project in the future, our maximum exposure to loss could increase to the extent we are required to fund those losses through capital contributions or working capital advances resulting from our guarantees or other commitments. The joint venture has recorded significant unapproved change orders and claims with the client as well as estimated recoveries of claims against suppliers and subcontractors arising from issues related to changes to the work scope, delays and lower than planned subcontractor activity. In February 2018, we made working capital advances to the joint venture of approximately
$47 million
to fund our proportionate share of the ongoing project execution activities. We anticipate our total funding requirements to the joint venture to be approximately
$300 million
to
$400 million
over the next 12 months. Our maximum exposure to loss will continue to increase as additional working capital is advanced to the joint venture. See Notes
7
and
18
to our consolidated financial statements for further discussion on the significant contingencies as well as unapproved change orders and claims related to this project.
U.K. Road projects.
We are involved in four privately financed projects, executed through joint ventures, to design, build, operate and maintain roadways for certain government agencies in the U.K. We have a
25%
ownership interest in each of these joint ventures and account for them using the equity method of accounting. The joint ventures have obtained financing through third parties that is nonrecourse to the joint venture partners. These joint ventures are VIEs; however, we are not the primary beneficiary. At
December 31, 2017
, included in our GS business segment, our assets and liabilities associated with our investment in this project recorded in our consolidated balance sheets were
$36 million
and
$10 million
, respectively. Our maximum exposure to loss represents our equity investments in these ventures.
EBIC Ammonia project.
We have an investment in a development corporation that has an indirect interest in the Egypt Basic Industries Corporation ("EBIC") ammonia plant project located in Egypt. We performed the EPC work for the project and completed our operations and maintenance services for the facility in the first half of 2012. We own
65%
of this development corporation and consolidate it for financial reporting purposes. The development corporation owns a
25%
ownership interest in a company that consolidates the ammonia plant which is considered a VIE. The development corporation accounts for its investment in the company using the equity method of accounting. The VIE is funded through debt and equity. Indebtedness of EBIC under its debt agreement is nonrecourse to us. We are not the primary beneficiary of the VIE. As of
December 31, 2017
, included in our E&C business segment, our assets and liabilities associated with our investment in this project, within our consolidated balance sheets, were
$38 million
and
$1 million
, respectively. Our maximum exposure to loss of
$25 million
indicated in the table above includes our proportionate share of the equity investment and amounts payable to us for services provided to the entity as of
December 31, 2017
.
Related Party Transactions
We often provide engineering, construction management and other subcontractor services to our joint ventures and our revenues include amounts related to recovering overhead costs for these services. For the years ended
December 31, 2017
,
2016
and
2015
, our revenues included
$133 million
,
$235 million
and
$291 million
, respectively, related to services we provided to our joint ventures, primarily those in our E&C business segment. Under the terms of our TSA with Brown & Root Industrial Services joint venture, we collect cash from customers and make payments to vendors and employees on behalf of the joint venture. For the years ended
December 31, 2017
and
2016
, we incurred approximately
$5 million
and
$16 million
, respectively, of reimbursable costs under the TSA. Also in 2015, we entered into an alliance agreement with our EPIC joint venture to provide certain pipe fabrication services to KBR. For the years ended
December 31, 2017
and
2016
, EPIC performed
$3 million
and
$25 million
, respectively, of services to KBR under the agreement. Amounts included in our consolidated balance sheets related to services we provided to our unconsolidated joint ventures for the years ended
December 31, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
Dollars in millions
|
2017
|
|
2016
|
Accounts receivable (a)
|
$
|
28
|
|
|
$
|
22
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts (b)
|
$
|
2
|
|
|
$
|
1
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts (b)
|
$
|
27
|
|
|
$
|
41
|
|
|
|
(a)
|
Includes a
$4 million
and
$11 million
net receivable from the Brown & Root Industrial Services joint venture at
December 31, 2017
and 2016, respectively.
|
|
|
(b)
|
Reflects CIE and BIE primarily related to joint ventures within our E&C business segment as discussed above.
|
Consolidated Variable Interest Entities
We consolidate VIEs if we determine we are the primary beneficiary of the project entity because we control the activities that most significantly impact the economic performance of the entity. The following is a summary of the significant VIEs where we are the primary beneficiary:
|
|
|
|
|
|
|
|
|
Dollars in millions
|
December 31, 2017
|
Total Assets
|
|
Total Liabilities
|
Gorgon LNG project
|
$
|
15
|
|
|
$
|
48
|
|
Escravos Gas-to-Liquids project
|
$
|
8
|
|
|
$
|
13
|
|
Fasttrax Limited project
|
$
|
57
|
|
|
$
|
47
|
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
December 31, 2016
|
Total Assets
|
|
Total Liabilities
|
Gorgon LNG project
|
$
|
28
|
|
|
$
|
60
|
|
Escravos Gas-to-Liquids project
|
$
|
11
|
|
|
$
|
22
|
|
Fasttrax Limited project
|
$
|
56
|
|
|
$
|
50
|
|
Gorgon LNG project.
We have a
30%
ownership in an Australian joint venture which was awarded a contract in 2005 for front end engineering design and in 2009 for EPC management services to construct an LNG plant. The joint venture is considered a VIE, and, because we are the primary beneficiary, we consolidate this joint venture for financial reporting purposes. We determined that we are the primary beneficiary of this project entity because we control the activities that most significantly impact economic performance of the entity.
Escravos Gas-to-Liquids ("GTL") project.
During 2005, we formed a joint venture to engineer and construct a gas monetization facility in Escravos, Nigeria, which was completed in 2014. We own a
50%
equity interest in the joint venture and determined that we are the primary beneficiary; accordingly, we have consolidated the joint venture for financial reporting purposes. There are no consolidated assets that collateralize the joint venture’s obligations. However, at
December 31, 2017
and
2016
, the joint venture had approximately
$3 million
and
$8 million
of cash, respectively, which mainly relates to advanced billings in connection with the joint venture’s obligations under the EPC contract that is expected to be fully closed out in 2018.
Fasttrax Limited project.
In December 2001, the Fasttrax joint venture ("Fasttrax") was created to provide to the U.K. MoD a fleet of
91
new heavy equipment transporters ("HETs") capable of carrying a 72-ton Challenger II tank. Fasttrax owns, operates and maintains the HET fleet and provides heavy equipment transportation services to the British Army. The purchase of the assets was completed in 2004, and the operating and service contracts related to the assets extend through 2023. Fasttrax's entity structure includes a parent entity and its
100%
owned subsidiary, Fasttrax Limited. KBR and its partner each own a
50%
interest in the parent entity, which is considered a VIE. We determined that we are the primary beneficiary of this project entity because we control the activities that most significantly impact economic performance of the entity. Therefore, we consolidate this VIE.
The purchase of the HETs by the joint venture was financed through two series of bonds secured by the assets of Fasttrax Limited and a bridge loan. Assets collateralizing Fasttrax’s senior bonds include cash and equivalents of
$21 million
and net property, plant and equipment of approximately
$34 million
as of
December 31, 2017
. See Note
14
to our consolidated financial statements for further details regarding our nonrecourse project-finance debt of this VIE consolidated by KBR, including the total amount of debt outstanding at
December 31, 2017
.
Acquisition of Noncontrolling Interest
During the three months ended December 31, 2017, we entered into an agreement to acquire the remaining
25%
noncontrolling interest in one of our joint ventures for
$8 million
, including a settlement of
$2 million
owed to the joint venture from the outside partner. The acquisition of these shares was recorded as an equity transaction, with a
$8 million
reduction in our paid-in capital in excess of par.
During the three months ended March 31, 2015, we entered into an agreement to acquire the noncontrolling interest in one of our consolidated joint ventures for
$40 million
. We also paid the partner previously accrued expenses of
$8 million
. The acquisition of these shares was recorded as an equity transaction, with a
$40 million
reduction in our paid-in capital in excess of par. In the fourth quarter of 2015,
25%
of total shares of this joint venture were issued to a new partner.
Note
13
. Pension Plans
We have elective defined contribution plans for our employees in the U.S. and retirement savings plans for our employees in the U.K., Canada and other locations. Our defined contribution plans provide retirement benefits in return for services rendered. These plans provide an individual account for each participant and have terms that specify how contributions to the participant’s account are to be determined rather than the amount of retirement benefits the participant is to receive. Contributions to these plans are based on pretax income discretionary amounts determined on an annual basis. Our expense for the defined contribution plans totaled
$52 million
in
2017
,
$51 million
in
2016
and
$67 million
in
2015
.
We have two frozen defined benefit plans in the U.S., one frozen plan in the U.K., and one frozen plan in Germany. We also participate in multi-employer plans in Canada. Substantially all of our defined benefit plans are funded pension plans, which define an amount of pension benefit to be provided, usually as a function of years of service or compensation.
Benefit obligations and plan assets
We used a December 31 measurement date for all plans in
2017
and
2016
. Plan assets, expenses and obligations for retirement plans are presented in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Int’l
|
|
United States
|
|
Int’l
|
Dollars in millions
|
2017
|
|
2016
|
Change in projected benefit obligations:
|
|
|
|
|
|
|
|
Projected benefit obligations at beginning of period
|
$
|
75
|
|
|
$
|
1,970
|
|
|
$
|
75
|
|
|
$
|
1,849
|
|
Acquisitions
|
—
|
|
|
—
|
|
|
12
|
|
|
3
|
|
Service cost
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Interest cost
|
3
|
|
|
53
|
|
|
3
|
|
|
63
|
|
Foreign currency exchange rate changes
|
—
|
|
|
186
|
|
|
—
|
|
|
(304
|
)
|
Actuarial (gain) loss
|
3
|
|
|
(78
|
)
|
|
—
|
|
|
448
|
|
Other
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Benefits paid
|
(4
|
)
|
|
(85
|
)
|
|
(15
|
)
|
|
(89
|
)
|
Projected benefit obligations at end of period
|
$
|
77
|
|
|
$
|
2,046
|
|
|
$
|
75
|
|
|
$
|
1,970
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
$
|
56
|
|
|
$
|
1,463
|
|
|
$
|
59
|
|
|
$
|
1,532
|
|
Acquisitions
|
—
|
|
|
—
|
|
|
8
|
|
|
—
|
|
Actual return on plan assets
|
7
|
|
|
119
|
|
|
3
|
|
|
235
|
|
Employer contributions
|
1
|
|
|
36
|
|
|
1
|
|
|
40
|
|
Foreign currency exchange rate changes
|
—
|
|
|
141
|
|
|
—
|
|
|
(255
|
)
|
Benefits paid
|
(4
|
)
|
|
(85
|
)
|
|
(15
|
)
|
|
(89
|
)
|
Other
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Fair value of plan assets at end of period
|
$
|
59
|
|
|
$
|
1,673
|
|
|
$
|
56
|
|
|
$
|
1,463
|
|
Funded status
|
$
|
(18
|
)
|
|
$
|
(373
|
)
|
|
$
|
(19
|
)
|
|
$
|
(507
|
)
|
Accumulated Benefit Obligation (ABO)
The ABO is the present value of benefits earned to date. The ABO for our United States pension plans was
$77 million
and
$75 million
as of December 31, 2017 and 2016, respectively. The ABO for our international pension plans was
$2 billion
and
$2 billion
as of December 31, 2017 and 2016, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Int’l
|
|
United States
|
|
Int’l
|
Dollars in millions
|
2017
|
|
2016
|
Amounts recognized on the consolidated balance sheets
|
|
|
|
|
|
|
|
Pension obligations
|
$
|
18
|
|
|
$
|
373
|
|
|
$
|
19
|
|
|
$
|
507
|
|
Net periodic cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Int’l
|
|
United States
|
|
Int’l
|
|
United States
|
|
Int’l
|
Dollars in millions
|
2017
|
|
2016
|
|
2015
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Interest cost
|
3
|
|
|
53
|
|
|
3
|
|
|
63
|
|
|
2
|
|
|
76
|
|
Expected return on plan assets
|
(3
|
)
|
|
(77
|
)
|
|
(3
|
)
|
|
(87
|
)
|
|
(3
|
)
|
|
(97
|
)
|
Settlements/curtailments
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized actuarial loss
|
1
|
|
|
30
|
|
|
1
|
|
|
28
|
|
|
5
|
|
|
43
|
|
Net periodic benefit cost
|
$
|
1
|
|
|
$
|
7
|
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
4
|
|
|
$
|
24
|
|
The amounts in accumulated other comprehensive loss that have not yet been recognized as components of net periodi
c benefit cost at
December 31, 2017
and
2016
, net of tax were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Int’l
|
|
United States
|
|
Int’l
|
Dollars in millions
|
2017
|
|
2016
|
Unrecognized actuarial loss, net of tax of $10 and $217, and $10 and $244, respectively
|
$
|
22
|
|
|
$
|
638
|
|
|
$
|
24
|
|
|
$
|
761
|
|
Total in accumulated other comprehensive loss
|
$
|
22
|
|
|
$
|
638
|
|
|
$
|
24
|
|
|
$
|
761
|
|
Estimated amounts that will be amortized from accumulated other comprehensive income, net of tax, into net periodic benefit cost in
2018
are as follows:
|
|
|
|
|
|
|
|
|
Dollars in millions
|
United States
|
|
Int’l
|
Actuarial loss
|
$
|
1
|
|
|
$
|
22
|
|
Total
|
$
|
1
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine
net periodic benefit cost
|
|
|
United States
|
|
Int'l
|
|
United States
|
|
Int'l
|
|
United States
|
|
Int'l
|
|
2017
|
|
2016
|
|
2015
|
Discount rate
|
3.73
|
%
|
|
2.60
|
%
|
|
3.42
|
%
|
|
3.75
|
%
|
|
2.89
|
%
|
|
3.65
|
%
|
Expected return on plan assets
|
6.01
|
%
|
|
5.40
|
%
|
|
5.00
|
%
|
|
6.10
|
%
|
|
4.81
|
%
|
|
6.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine benefit obligations at measurement date
|
|
|
United States
|
|
Int'l
|
|
United States
|
|
Int'l
|
|
2017
|
|
2016
|
Discount rate
|
3.33
|
%
|
|
2.50
|
%
|
|
3.73
|
%
|
|
2.60
|
%
|
Assumed long-term rates of return on plan assets and discount rates for estimating benefit obligations vary for the different plans according to the local economic conditions. The expected long-term rate of return on assets was determined by a stochastic projection that takes into account asset allocation strategies, historical long-term performance of individual asset classes, an analysis of additional return (net of fees) generated by active management, risks using standard deviations and correlations of returns among the asset classes that comprise the plans’ asset mix. The discount rate used to determine the benefit obligations was computed using a yield curve approach that matches plan specific cash flows to a spot rate yield curve based on high quality corporate bonds. Because all plans have been frozen, there is no rate of compensation increase.
Plan fiduciaries of our retirement plans set investment policies and strategies and oversee the investment direction, which includes selecting investment managers, commissioning asset-liability studies and setting long-term strategic targets. Long-term strategic investment objectives include preserving the funded status of the plan and balancing risk and return and have diversified asset types, fund strategies and fund managers. Targeted asset allocation ranges are guidelines, not limitations and occasionally plan fiduciaries will approve allocations above or below a target range.
The target asset allocation for our U.S. and International plans for
2018
is as follows:
|
|
|
|
|
|
|
Asset Allocation
|
2018 Targeted
|
|
United States
|
|
Int'l
|
Equity funds and securities
|
51
|
%
|
|
30
|
%
|
Fixed income funds and securities
|
39
|
%
|
|
50
|
%
|
Hedge funds
|
—
|
%
|
|
—
|
%
|
Real estate funds
|
1
|
%
|
|
5
|
%
|
Other
|
9
|
%
|
|
15
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
The range of targeted asset allocations for our International plans for
2018
and
2017
, by asset class, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
International Plans
|
2018 Targeted
|
|
2017 Targeted
|
|
Percentage Range
|
|
Percentage Range
|
|
Minimum
|
|
Maximum
|
|
Minimum
|
|
Maximum
|
Equity funds and securities
|
—
|
%
|
|
60
|
%
|
|
—
|
%
|
|
60
|
%
|
Fixed income funds and securities
|
—
|
%
|
|
100
|
%
|
|
—
|
%
|
|
100
|
%
|
Hedge funds
|
—
|
%
|
|
35
|
%
|
|
—
|
%
|
|
35
|
%
|
Real estate funds
|
—
|
%
|
|
10
|
%
|
|
—
|
%
|
|
10
|
%
|
Other
|
—
|
%
|
|
20
|
%
|
|
—
|
%
|
|
20
|
%
|
The range of targeted asset allocations for our U.S. plans for
2018
and
2017
, by asset class, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Plans
|
2018 Targeted
|
|
2017 Targeted
|
|
Percentage Range
|
|
Percentage Range
|
|
Minimum
|
|
Maximum
|
|
Minimum
|
|
Maximum
|
Cash and cash equivalents
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Equity funds and securities
|
50
|
%
|
|
53
|
%
|
|
52
|
%
|
|
55
|
%
|
Fixed income funds and securities
|
37
|
%
|
|
40
|
%
|
|
44
|
%
|
|
47
|
%
|
Real estate funds
|
1
|
%
|
|
1
|
%
|
|
1
|
%
|
|
1
|
%
|
Other
|
9
|
%
|
|
9
|
%
|
|
—
|
%
|
|
—
|
%
|
ASC 820 - Fair Value Measurement addresses fair value measurements and disclosures, defines fair value, establishes a framework for using fair value to measure assets and liabilities and expands disclosures about fair value measurements. This standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. ASC 820 establishes a three-tier value hierarchy, categorizing the inputs used to measure fair value. The inputs and methodology used for valuing securities are not an indication of the risk associated with investing in those securities. The following is a description of the primary valuation methodologies and classification used for assets measured at fair value.
Fair values of our Level 1 assets are based on observable inputs such as unadjusted quoted prices for identical assets in active markets. These consist of securities valued at the closing price reported on the active market on which the individual securities are traded.
Fair values of our Level 2 assets are based on inputs other than the quoted prices in active markets that are observable either directly or indirectly, such as quoted prices for similar assets; quoted prices that are in inactive markets; inputs other than quoted prices that are observable for the asset; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Fair values of our Level 3 assets are based on unobservable inputs in which there is little or no market data and require us to develop our own assumptions.
A summary of total investments for KBR’s pension plan assets measured at fair value is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date
|
Dollars in millions
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Asset Category at December 31, 2017
|
|
|
|
|
|
|
|
United States plan assets
|
|
|
|
|
|
|
|
Investments measured at net asset value (a)
|
$
|
59
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total United States plan assets
|
$
|
59
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
International plan assets
|
|
|
|
|
|
|
|
Equities
|
$
|
60
|
|
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
26
|
|
Fixed income
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Real estate
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Cash and cash equivalents
|
8
|
|
|
8
|
|
|
—
|
|
|
—
|
|
Other
|
40
|
|
|
—
|
|
|
—
|
|
|
40
|
|
Investments measured at net asset value (a)
|
1,557
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total international plan assets
|
$
|
1,673
|
|
|
$
|
42
|
|
|
$
|
—
|
|
|
$
|
74
|
|
Total plan assets at December 31, 2017
|
$
|
1,732
|
|
|
$
|
42
|
|
|
$
|
—
|
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date
|
Dollars in millions
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Asset Category at December 31, 2016
|
|
|
|
|
|
|
|
United States plan assets
|
|
|
|
|
|
|
|
Investments measured at net asset value (a)
|
$
|
56
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total United States plan assets
|
$
|
56
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
International plan assets
|
|
|
|
|
|
|
|
Equities
|
$
|
76
|
|
|
$
|
60
|
|
|
$
|
—
|
|
|
$
|
16
|
|
Fixed income
|
12
|
|
|
—
|
|
|
—
|
|
|
12
|
|
Real estate
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Cash and cash equivalents
|
8
|
|
|
8
|
|
|
—
|
|
|
—
|
|
Other
|
50
|
|
|
—
|
|
|
—
|
|
|
50
|
|
Investments measured at net asset value (a)
|
1,313
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total international plan assets
|
$
|
1,463
|
|
|
$
|
68
|
|
|
$
|
—
|
|
|
$
|
82
|
|
Total plan assets at December 31, 2016
|
$
|
1,519
|
|
|
$
|
68
|
|
|
$
|
—
|
|
|
$
|
82
|
|
(a) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Balance Sheet.
The fair value measurement of plan assets using significant unobservable inputs (Level 3) changed each year due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
Total
|
|
Equities
|
|
Fixed Income
|
|
Real Estate
|
|
Other
|
International plan assets
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
$
|
45
|
|
|
$
|
12
|
|
|
$
|
14
|
|
|
$
|
6
|
|
|
$
|
13
|
|
Return on assets held at end of year
|
14
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
11
|
|
Purchases, sales and settlements
|
32
|
|
|
5
|
|
|
(1
|
)
|
|
(3
|
)
|
|
31
|
|
Foreign exchange impact
|
(9
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
—
|
|
|
(5
|
)
|
Balance as of December 31, 2016
|
$
|
82
|
|
|
$
|
16
|
|
|
$
|
12
|
|
|
$
|
4
|
|
|
$
|
50
|
|
Return on assets held at end of year
|
(1
|
)
|
|
3
|
|
|
—
|
|
|
(1
|
)
|
|
(3
|
)
|
Return on assets sold during the year
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Purchases, sales and settlements, net
|
(15
|
)
|
|
5
|
|
|
(8
|
)
|
|
(1
|
)
|
|
(11
|
)
|
Foreign exchange impact
|
5
|
|
|
2
|
|
|
1
|
|
|
1
|
|
|
1
|
|
Balance as of December 31, 2017
|
$
|
74
|
|
|
$
|
26
|
|
|
$
|
5
|
|
|
$
|
3
|
|
|
$
|
40
|
|
Expected cash flows
Contributions.
Funding requirements for each plan are determined based on the local laws of the country where such plans reside. In certain countries the funding requirements are mandatory while in other countries they are discretionary. We expect to contribute
$40 million
to our pension plans in
2018
.
Benefit payments.
The following table presents the expected benefit payments over the next 10 years.
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
Dollars in millions
|
United States
|
|
Int’l
|
2018
|
$
|
5
|
|
|
$
|
56
|
|
2019
|
$
|
5
|
|
|
$
|
57
|
|
2020
|
$
|
5
|
|
|
$
|
58
|
|
2021
|
$
|
5
|
|
|
$
|
60
|
|
2022
|
$
|
5
|
|
|
$
|
61
|
|
Years 2023 – 2027
|
$
|
25
|
|
|
$
|
327
|
|
Multiemployer Pension Plans
We participate in multiemployer plans in Canada. Generally, the plans provide defined benefits to substantially all employees covered by collective bargain agreements. Under the terms of these agreements, our obligations are discharged upon plan contributions and are not subject to any assessments for unfunded liabilities upon our termination or withdrawal.
Our aggregate contributions to these plans were
$3 million
in
2017
,
$1 million
in
2016
and
$8 million
in
2015
. At
December 31, 2017
, none of the plans in which we participate is individually significant to our consolidated financial statements.
Deferred Compensation Plans
Our Elective Deferral Plan is a nonqualified deferred compensation program that provides benefits payable to officers, certain key employees or their designated beneficiaries and non-employee directors at specified future dates, upon retirement, or death. Except for
$6 million
and
$7 million
of mutual funds included in "Other assets" on our consolidated balance sheets at
December 31, 2017
and
2016
, respectively, designated for a portion of our employee deferral plan, the plan is unfunded. The mutual funds are carried at fair value which includes readily determinable or published net asset values and may be liquidated in the near term without restrictions.
The following table presents our obligations under our employee deferred compensation plan included in "Employee compensation and benefits" in our consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
December 31,
|
Dollars in millions
|
2017
|
|
2016
|
Deferred compensation plans obligations
|
$
|
68
|
|
|
$
|
70
|
|
Note
14
. Debt and Other Credit Facilities
Credit Agreement
On September 25, 2015, we entered into a
$1 billion
, unsecured revolving credit agreement (the "Credit Agreement") with a syndicate of banks. The Credit Agreement is guaranteed by certain of the Company's domestic subsidiaries, matures in
September 2020
and is available for cash borrowings and the issuance of letters of credit related to general corporate needs. Subject to certain conditions, we may request (i) that the aggregate commitments under the Credit Agreement be increased by up to an additional
$500 million
, and (ii) that the maturity date of the Credit Agreement be extended by two additional one-year terms.
Amounts drawn under the Credit Agreement will bear interest at variable rates, per annum, based either on (i) the London interbank offered rate ("LIBOR") plus an applicable margin of 1.375% to 1.75%, or (ii) a base rate plus an applicable margin of 0.375% to 0.75%, with the base rate equal to the highest of (a) reference bank’s publicly announced base rate, (b) the Federal Funds Rate plus 0.5%, or (c) LIBOR plus 1%. The amount of the applicable margin to be applied will be determined by the Company’s ratio of consolidated debt to consolidated EBITDA for the prior four fiscal quarters, as defined in the Credit Agreement. The Credit Agreement provides for fees on letters of credit issued under the Credit Agreement at a rate equal to the applicable margin for LIBOR-based loans, except for performance letters of credit, which are priced at 50% of such applicable margin. KBR pays an annual issuance fee of 0.125% of the face amount of a letter of credit and pays a commitment fee of 0.225% to 0.25%, per annum, on any unused portion of the commitment under the Credit Agreement based on the Company's consolidated leverage ratio.
As of
December 31, 2017
, there were
$37 million
in letters of credit outstanding under the Credit Agreement. As a result of the Wyle and HTSI acquisitions discussed in Note
3
to our consolidated financial statements, we funded
$700 million
of acquisition consideration with borrowings under our Credit Agreement. Approximately
$470 million
of borrowings remains outstanding under the Credit Agreement as of
December 31, 2017
. We intend to seek long-term financing to replace some or all of the outstanding borrowings under our Credit Agreement in the next 12 months.
The Credit Agreement contains customary covenants as defined by the agreement which include financial covenants requiring maintenance of a ratio of consolidated debt to a rolling four-quarter consolidated EBITDA not greater than
3.5
to 1 and a minimum consolidated net worth of
$1.2 billion
plus
50%
of consolidated net income for each quarter beginning September 30, 2015 and
100%
of any increase in shareholders’ equity attributable to the sale of equity interests, but excluding any adjustments in shareholders' equity attributable to changes in foreign currency translation adjustments. In December 2016, we obtained an amendment to the EBITDA financial covenant to eliminate the impact, for certain periods and subject to certain dollar limits, of previously recorded project losses attributed to an EPC ammonia project and a power project in the U.S. The amendment also amends the maximum ratio of consolidated debt to consolidated EBITDA to
3.25 to 1
effective for periods after December 31, 2017. As of
December 31, 2017
, we were in compliance with our financial covenants.
The Credit Agreement contains a number of other covenants restricting, among other things, our ability to incur additional liens and indebtedness, enter into asset sales, repurchase our equity shares and make certain types of investments. Our subsidiaries are restricted from incurring indebtedness, except if such indebtedness relates to purchase money obligations, capitalized leases, refinancing or renewals secured by liens upon or in property acquired, constructed or improved in an aggregate principal amount not to exceed
$200 million
at any time outstanding. Additionally, our subsidiaries may incur unsecured indebtedness not to exceed
$200 million
in aggregate outstanding principal amount at any time. We are also permitted to repurchase our equity shares, provided that no such repurchases shall be made from proceeds borrowed under the Credit Agreement, and that the aggregate purchase price and dividends paid after September 25, 2015, does not exceed the Distribution Cap (equal to the sum of
$750 million
plus the lesser of (1)
$400 million
and (2) the amount received by us in connection with the arbitration and subsequent litigation of the PEP contracts as discussed in Note
17
to our consolidated financial statements). As of
December 31, 2017
, the remaining availability under the Distribution Cap was approximately
$957 million
.
In February 2018, we received a financing commitment letter (“the Commitment Letter”) from a lender in which the lender has committed to provide us with senior, secured credit facilities in the amount of up to $2.2 billion, pursuant to the terms of the Commitment Letter. We expect to use the proceeds from this credit facility to provide capital for acquisition activity, funding of our projected share of the Ichthys LNG project completion activities, refinancing of borrowing under our existing revolving
credit agreement and for general corporate purposes. The financing commitments are subject to certain conditions set forth in the Commitment Letter.
Letters of credit, surety bonds and guarantees
In connection with certain projects, we are required to provide letters of credit, surety bonds or guarantees to our customers. Letters of credit are provided to certain customers and counterparties in the ordinary course of business as credit support for contractual performance guarantees, advanced payments received from customers and future funding commitments. We have approximately
$2 billion
in committed and uncommitted lines of credit to support the issuance of letters of credit and as of
December 31, 2017
, we have issued
$365 million
of letters of credit under our present capacity. As of
December 31, 2017
, we have approximately
$1 billion
of remaining capacity in these committed and uncommitted lines of credit after taking into account the
$470 million
of outstanding revolver borrowings. The letters of credit outstanding included
$37 million
issued under our Credit Agreement and
$328 million
issued under uncommitted bank lines as of
December 31, 2017
. Of the letters of credit outstanding under our Credit Agreement,
no
letters of credit have expiry dates beyond the maturity date of the Credit Agreement. Of the total letters of credit outstanding,
$170 million
relate to our joint venture operations where the letters of credit are posted using our capacity to support our pro-rata share of obligations under various contracts executed by joint ventures of which we are a member. As the need arises, future projects will be supported by letters of credit issued under our Credit Agreement or other lines of credit arranged on a bilateral, syndicated or other basis. We believe we have adequate letter of credit capacity under our Credit Agreement and bilateral lines of credit to support our operations for the next twelve months.
Nonrecourse Project Debt
Fasttrax Limited, a joint venture in which we indirectly own a
50%
equity interest with an unrelated partner, was awarded a concession contract in 2001 with the U.K. MoD to provide a Heavy Equipment Transporter Service to the British Army. See Note
12
to our consolidated financial statements for further discussion on the joint venture. Under the terms of the arrangement, Fasttrax Limited operates and maintains
91
heavy equipment transporters HETs for a term of
22
years. The purchase of the HETs by the joint venture was financed through two series of bonds secured by the assets of Fasttrax Limited and a bridge loan totaling approximately
£84.9 million
(approximately
$120 million
at the exchange rate on the date of the transaction). The secured bonds are an obligation of Fasttrax Limited and are not a debt obligation of KBR as they are nonrecourse to the joint venture partners. Accordingly, in the event of a default on the notes, the lenders may only look to the assets of Fasttrax Limited for repayment. The bridge loan of approximately
£12.2 million
(approximately
$17 million
at the exchange rate on the date of the transaction) was replaced when the joint venture partners funded their equity and subordinated debt contributions in 2005.
The secured bonds were issued in two classes consisting of Class A
3.5%
Index Linked Bonds in the amount of
£56 million
(approximately
$79 million
at the exchange rate on the date of the transaction) and Class B
5.9%
Fixed Rate Bonds in the amount of
£16.7 million
(approximately
$24 million
at the exchange rate on the date of the transaction). Semi-annual payments on both classes of bonds will continue through maturity in 2021. The subordinated notes payable to each of the partners initially bear interest at
11.25%
increasing to
16%
over the term of the notes until maturity in 2025. For financial reporting purposes, only our partner's portion of the subordinated notes appears in the consolidated financial statements.
The following table summarizes the combined principal installments for both classes of bonds and subordinated notes, including inflation adjusted bond indexation over the next five years and beyond as of
December 31, 2017
:
|
|
|
|
|
Dollars in millions
|
Payments Due
|
2018
|
$
|
10
|
|
2019
|
$
|
10
|
|
2020
|
$
|
11
|
|
2021
|
$
|
5
|
|
2022
|
$
|
1
|
|
Beyond 2022
|
$
|
1
|
|
Note
15
. Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from
35%
to
21%
; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring the inclusion of current U.S. federal taxable income of certain earnings of controlled foreign corporations;
(5) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax (BEAT), a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing rules related to uses and limitations on net operating loss carryforwards created in tax years beginning after December 31, 2017.
The SEC staff issued Staff Accounting Bulletin ("SAB") 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period of up to one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provision
s of the tax laws that were in effect immediately before the enactment of the Tax Act.
For various reasons that are discussed more fully below, we have not completed our accounting for the income tax effects of certain elements of the Tax Act. If we are able to make reasonable estimates of the effects of elements for which our analysis is not yet complete, we recorded provisional adjustments.
Reduction of U.S. federal corporate tax rate:
The Tax Act reduces the corporate tax rate to
21%
, effective January 1, 2018. For our existing U.S. deferred tax assets and liabilities, we have recorded a provisional decrease of
$50 million
offset by a provisional decrease in the valuation allowance in the same amount. Additionally, for our indefinite-lived intangible deferred tax liability, we recorded a provisional decrease of
$18 million
with a corresponding net adjustment to deferred income tax benefit of
$18 million
for the year ended December 31, 2017. While we are able to make a reasonable estimate of the impact of the reduction in the corporate rate, it may be impacted by other analyses related to changes in estimates that can result from finalizing the filing of our 2017 U.S. income tax return and changes that may be a direct impact of other provisional amounts recorded due to the enactment of the Tax Act. We do not expect any changes to be material.
Deemed Repatriation Transition Tax:
The Deemed Repatriation Transition Tax ("Transition Tax") is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. We were able to make a reasonable estimate of our E&P and computed a Transition Tax of
$146 million
which was fully offset by foreign tax credits generated by the deemed repatriation as well as previously valued foreign tax credit carryforwards available for use. However, our Transition Tax amount is provisional as we are continuing to gather additional information to more precisely determine our E&P and compute the amount of the Transition Tax.
Valuation allowances:
We also assessed whether our valuation allowance analysis
is affected by various aspects of the Tax Act (e.g., deemed repatriation of deferred foreign income, global intangible low-taxed income ("GILTI ") inclusions, new categories of FTCs). Since, as discussed herein, the company has recorded provisional amounts related to certain portions of the Tax Act, any corresponding determination of the need for or change in a valuation allowance is also provisional.
Additionally, as part of the Tax Act, the U.S. has enacted a tax on "base eroding" payments from the U.S. and a minimum tax on foreign earnings (GILTI). Because aspects of this new minimum tax and the effect on our operations are uncertain and because aspects of the accounting rules associated with this new minimum tax have not been resolved, we have not made a provisional accrual for the deferred tax aspects of this new provision and consequently have not made an accounting policy election on the deferred tax treatment of this tax.
The United States and foreign components of income (loss) before income taxes and noncontrolling interests were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
Dollars in millions
|
2017
|
|
2016
|
|
2015
|
United States
|
$
|
84
|
|
|
$
|
(250
|
)
|
|
$
|
(35
|
)
|
Foreign:
|
|
|
|
|
|
United Kingdom
|
40
|
|
|
55
|
|
|
105
|
|
Australia
|
(28
|
)
|
|
38
|
|
|
32
|
|
Canada
|
15
|
|
|
(8
|
)
|
|
87
|
|
Middle East
|
42
|
|
|
66
|
|
|
35
|
|
Africa
|
20
|
|
|
76
|
|
|
34
|
|
Other
|
76
|
|
|
56
|
|
|
54
|
|
Subtotal
|
165
|
|
|
283
|
|
|
347
|
|
Total
|
$
|
249
|
|
|
$
|
33
|
|
|
$
|
312
|
|
The total income taxes included in the statements of operations and in shareholders' equity were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
Dollars in millions
|
2017
|
|
2016
|
|
2015
|
Benefit (Provision) for income taxes
|
$
|
193
|
|
|
$
|
(84
|
)
|
|
$
|
(86
|
)
|
Shareholders' equity, foreign currency translation adjustment
|
6
|
|
|
(3
|
)
|
|
(3
|
)
|
Shareholders' equity, pension and post-retirement benefits
|
(27
|
)
|
|
45
|
|
|
(22
|
)
|
Total income taxes
|
$
|
172
|
|
|
$
|
(42
|
)
|
|
$
|
(111
|
)
|
The components of the provision for income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
Current
|
|
Deferred
|
|
Total
|
Year-ended December 31, 2017
|
|
|
|
|
|
Federal
|
$
|
(6
|
)
|
|
$
|
230
|
|
|
$
|
224
|
|
Foreign
|
(122
|
)
|
|
92
|
|
|
(30
|
)
|
State and other
|
(2
|
)
|
|
1
|
|
|
(1
|
)
|
(Provision) benefit for income taxes
|
$
|
(130
|
)
|
|
$
|
323
|
|
|
$
|
193
|
|
|
|
|
|
|
|
Year-ended December 31, 2016
|
|
|
|
|
|
Federal
|
$
|
(5
|
)
|
|
$
|
9
|
|
|
$
|
4
|
|
Foreign
|
(61
|
)
|
|
(26
|
)
|
|
(87
|
)
|
State and other
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Provision for income taxes
|
$
|
(66
|
)
|
|
$
|
(18
|
)
|
|
$
|
(84
|
)
|
|
|
|
|
|
|
Year-ended December 31, 2015
|
|
|
|
|
|
Federal
|
$
|
(17
|
)
|
|
$
|
8
|
|
|
$
|
(9
|
)
|
Foreign
|
(55
|
)
|
|
(22
|
)
|
|
(77
|
)
|
State and other
|
—
|
|
|
—
|
|
|
—
|
|
Provision for income taxes
|
$
|
(72
|
)
|
|
$
|
(14
|
)
|
|
$
|
(86
|
)
|
The components of our total foreign income tax provision were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
Dollars in millions
|
2017
|
|
2016
|
|
2015
|
United Kingdom
|
$
|
(7
|
)
|
|
$
|
(6
|
)
|
|
$
|
(15
|
)
|
Australia
|
6
|
|
|
—
|
|
|
16
|
|
Canada
|
—
|
|
|
1
|
|
|
3
|
|
Middle East
|
(10
|
)
|
|
(24
|
)
|
|
(8
|
)
|
Africa
|
1
|
|
|
(22
|
)
|
|
(10
|
)
|
Other
|
(20
|
)
|
|
(36
|
)
|
|
(63
|
)
|
Foreign provision for income taxes
|
$
|
(30
|
)
|
|
$
|
(87
|
)
|
|
$
|
(77
|
)
|
Our effective tax rates on income from operations differed from the statutory U.S. federal income tax rate of
35%
as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
U.S. statutory federal rate, expected (benefit) provision
|
35
|
%
|
|
35
|
%
|
|
35
|
%
|
Increase (reduction) in tax rate from:
|
|
|
|
|
|
Rate differentials on foreign earnings
|
(5
|
)
|
|
(28
|
)
|
|
(10
|
)
|
Noncontrolling interests and equity earnings
|
(2
|
)
|
|
(28
|
)
|
|
(8
|
)
|
State and local income taxes, net of federal benefit
|
1
|
|
|
—
|
|
|
2
|
|
Other permanent differences, net
|
(8
|
)
|
|
54
|
|
|
—
|
|
Contingent liability accrual
|
(2
|
)
|
|
41
|
|
|
(1
|
)
|
U.S. taxes on foreign unremitted earnings
|
—
|
|
|
174
|
|
|
1
|
|
Change in valuation allowance
|
(90
|
)
|
|
3
|
|
|
6
|
|
U.S. tax reform
|
(7
|
)
|
|
—
|
|
|
—
|
|
U.K. statutory rate change
|
—
|
|
|
4
|
|
|
3
|
|
Effective tax rate on income from operations
|
(78
|
)%
|
|
255
|
%
|
|
28
|
%
|
The primary components of our deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
Dollars in millions
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
Employee compensation and benefits
|
$
|
122
|
|
|
$
|
166
|
|
Foreign tax credit carryforwards
|
279
|
|
|
356
|
|
Accrued foreign tax credit carryforwards
|
—
|
|
|
93
|
|
Loss carryforwards
|
90
|
|
|
69
|
|
Insurance accruals
|
8
|
|
|
15
|
|
Allowance for bad debt
|
3
|
|
|
9
|
|
Accrued liabilities
|
30
|
|
|
49
|
|
Construction contract accounting
|
5
|
|
|
—
|
|
Other
|
15
|
|
|
—
|
|
Total gross deferred tax assets
|
552
|
|
|
757
|
|
Valuation allowances
|
(217
|
)
|
|
(542
|
)
|
Net deferred tax assets
|
335
|
|
|
215
|
|
Deferred tax liabilities:
|
|
|
|
Construction contract accounting
|
—
|
|
|
(34
|
)
|
Intangible amortization
|
(20
|
)
|
|
(29
|
)
|
Indefinite-lived intangible amortization
|
(31
|
)
|
|
(39
|
)
|
Fixed asset depreciation
|
2
|
|
|
2
|
|
Accrued foreign tax credit carryforwards
|
(4
|
)
|
|
—
|
|
Unremitted foreign earnings
|
—
|
|
|
(63
|
)
|
Other
|
—
|
|
|
(82
|
)
|
Total gross deferred tax liabilities
|
(53
|
)
|
|
(245
|
)
|
Deferred income tax (liabilities) assets, net
|
$
|
282
|
|
|
$
|
(30
|
)
|
The valuation allowance for deferred tax assets was
$217 million
and
$542 million
at
December 31, 2017
and
2016
, respectively. The net change in the total valuation allowance was a decrease of
$325 million
in
2017
and remained unchanged in
2016
. The valuation allowance at
December 31, 2017
was primarily related to foreign tax credit carryforwards and foreign and state net operating loss carryforwards that, in the judgment of management, are not more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income and tax-planning strategies in making this assessment. For the year ended December 31, 2017, our valuation allowance in the U.S. changed by
$105 million
related to current year utilization of foreign tax credit carryforwards as well as the provisional impacts recorded related to the Tax Act as previously discussed above. Additionally, we recorded a valuation allowance release of
$223 million
on the basis of management's reassessment of the amount of its U.S. deferred tax assets that are more likely than not to be realized. During the fourth quarter ended December 31, 2017, we achieved twelve quarters of cumulative pretax income in the U.S. as well as projected future U.S. taxable income and favorability in foreign tax credit utilization due to the enactment of the Tax Act, management determined that there is sufficient positive evidence to conclude that it is more likely than not that additional deferred taxes of
$194 million
are realizable. It therefore reduced the valuation accordingly.
The net deferred tax balance by major jurisdiction after valuation allowance as of
December 31, 2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
Net Gross Deferred Asset (Liability)
|
|
Valuation Allowance
|
|
Deferred Asset (Liability), net
|
United States
|
$
|
372
|
|
|
$
|
(178
|
)
|
|
$
|
194
|
|
United Kingdom
|
81
|
|
|
—
|
|
|
81
|
|
Australia
|
10
|
|
|
(1
|
)
|
|
9
|
|
Canada
|
21
|
|
|
(16
|
)
|
|
5
|
|
Other
|
15
|
|
|
(22
|
)
|
|
(7
|
)
|
Total
|
$
|
499
|
|
|
$
|
(217
|
)
|
|
$
|
282
|
|
At
December 31, 2017
, the amount of gross tax attributes available prior to the offset with related uncertain tax positions were as follows:
|
|
|
|
|
|
|
|
|
Dollars in millions
|
December 31, 2017
|
|
Expiration
|
Foreign tax credit carryforwards
|
$
|
330
|
|
|
2019-2026
|
Foreign net operating loss carryforwards
|
$
|
112
|
|
|
2018-2038
|
Foreign net operating loss carryforwards
|
$
|
108
|
|
|
Indefinite
|
State net operating loss carryforwards
|
$
|
677
|
|
|
Various
|
As a result of the enactment of the U.S. Tax Act, substantially all of our previously untaxed accumulated and current E&P of certain of our foreign subsidiaries were subject to U.S. tax. Repatriations of these foreign earnings will now generally be free of U.S. tax but may incur withholding and/or state taxes. Although we have provided for taxes on our previously untaxed accumulated and current E&P of certain of our foreign subsidiaries pursuant to the Tax Act, we still must assess our future U.S. and non-U.S. cash needs such as 1) our anticipated foreign working capital requirements, including funding of our U.K. pension plan, 2) the expected growth opportunities across all geographical markets and 3) our plans to invest in strategic growth opportunities that may include acquisitions around the world. As of
December 31, 2017
, the cumulative amount of permanently reinvested foreign earnings is
$1.3 billion
. With the enactment of the Tax Act, these previously unremitted earnings have now been subject to U.S. tax. However, these undistributed earnings could be subject to additional taxes (withholding and/or state taxes) if remitted, or deemed remitted, as a dividend.
A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
2017
|
|
2016
|
|
2015
|
Balance at January 1,
|
$
|
261
|
|
|
$
|
257
|
|
|
$
|
228
|
|
Increases related to current year tax positions
|
2
|
|
|
2
|
|
|
18
|
|
Increases related to tax positions from acquisitions
|
—
|
|
|
14
|
|
|
—
|
|
Increases related to prior year tax positions
|
1
|
|
|
10
|
|
|
35
|
|
Decreases related to prior year tax positions
|
(1
|
)
|
|
(4
|
)
|
|
(3
|
)
|
Settlements
|
(80
|
)
|
|
(10
|
)
|
|
(2
|
)
|
Lapse of statute of limitations
|
(1
|
)
|
|
(6
|
)
|
|
(16
|
)
|
Other, primarily due to exchange rate fluctuations affecting non-U.S. tax positions
|
2
|
|
|
(2
|
)
|
|
(3
|
)
|
Balance at December 31,
|
$
|
184
|
|
|
$
|
261
|
|
|
$
|
257
|
|
The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was approximately
$170 million
as of
December 31, 2017
. The difference between this amount and the amounts reflected in the tabular reconciliation above relates primarily to deferred income tax benefits on uncertain tax positions related to income taxes. In the next twelve months, it is reasonably possible that our uncertain tax positions could change by approximately
$70 million
due to settlements with tax authorities and the expirations of statutes of limitations.
We recognize accrued interest and penalties related to uncertain tax positions in income tax expense in our consolidated statements of operations. Our accrual for interest and penalties was
$21 million
and
$14 million
for each of the years ended
December 31, 2017
and
2016
, respectively. During the years ended
December 31, 2017
, we recognized net interest and penalty
charges of
$5 million
related to uncertain tax positions. During the years ended
December 31, 2016
and
2015
, we recognized net interest and penalties charges (benefits) of less than
$1 million
related to uncertain tax positions.
KBR is the parent of a group of domestic companies that are members of a U.S. consolidated federal income tax return. We also file income tax returns in various states and foreign jurisdictions. With few exceptions, we are no longer subject to examination by tax authorities for U.S. federal or state and local income tax for years before 2007.
KBR is subject to a tax sharing agreement primarily covering periods prior to the April 2007 separation from Halliburton. The tax sharing agreement provides, in part, that KBR will be responsible for any audit settlements directly attributable to our business activity for periods prior to our separation from our former parent. As of
December 31, 2017
and
2016
, we have recorded
$5 million
and
$19 million
in "Other liabilities" on our consolidated balance sheets, respectively, for tax related items under the tax sharing agreement. During the period ended December 31, 2017, the change in "Other liabilities" reflects additional settlements relating to periods prior to our separation from our former parent. As a result of this settlement, we recognized a gain of
$14 million
in "Other non-operating income" on our consolidated statements of operations for the year ended
December 31, 2017
. The balance is not due until receipt by KBR of future foreign tax credit refund claim filed with the IRS. As a result of the settlement, we will not continue to claim recovery on a tax position that we previously deemed uncertain. The settlements in the table above for 2017 reflects the effect on our uncertain tax positions of these settlements with our former parent.
Note
16
. U.S. Government Matters
We provide services to various U.S. governmental agencies, which include the U.S. Department of Defense ("DoD") and the Department of State. We may have disagreements or experience performance issues on our U.S. government contracts. When performance issues arise under any of these contracts, the U.S. government retains the right to pursue various remedies, including challenges to expenditures, suspension of payments, fines and suspensions or debarment from future business with the U.S. government.
Between 2002 and 2011, we provided significant support to the U.S. Army and other U.S. government agencies in support of the war in Iraq under the LogCAP III contract. We continue to support the U.S. government around the world under the LogCAP IV and other contracts. We have been in the process of closeout of the LogCAP III contract since 2011, and we expect the closeout process to continue through at least 2018. As a result of our work under LogCAP III, there are claims and disputes pending between us and the U.S. government, which need to be resolved in order to close the contracts. The closeout process includes resolving objections raised by the U.S. government through a billing dispute process referred to as Form 1s and Memorandums for Record ("MFRs"). We continue to work with the U.S. government to resolve these issues and are engaged in efforts to reach mutually acceptable resolution of these outstanding matters. However, for certain of these matters, we have filed claims with the Armed Services Board of Contract Appeals ("ASBCA") or the U.S. Court of Federal Claims ("COFC"). We also have matters related to ongoing litigation or investigations involving U.S. government contracts. We anticipate billing additional labor, vendor resolution and litigation costs as we resolve the open matters. At this time, we cannot determine the timing or net amounts to be collected or paid to close out these contracts.
Form 1s
The U.S. government has issued Form 1s questioning or objecting to costs we billed to them primarily related to (1) our
use of private security and our provision of containerized housing under the LogCAP III contract discussed below and (2) our
provision of emergency construction services primarily to U.S. government facilities damaged by Hurricanes Katrina and Wilma, under our CONCAP III contract with the U.S. Navy. As a consequence of the issuance of the Form 1s, the U.S. government has withheld payment to us on outstanding invoices, pending resolution of these matters. In certain cases, we have also withheld payment to our subcontractors related to pay-when-paid contractual terms.
The U.S. government had issued Form 1s, questioning
$171 million
and
$173 million
of billed costs as of
December 31, 2017
and
2016
, respectively. They had previously paid us
$88 million
and
$90 million
as of
December 31, 2017
and
2016
, respectively, related to our services on these contracts. The remaining balance of
$83 million
as of
December 31, 2017
is included on our consolidated balance sheets in “Claims and accounts receivable" and "CIE" in the amounts of
$79 million
and
$4 million
, respectively. The remaining balance of
$83 million
as of December 31, 2016 is included in "Claims and accounts receivable" on our consolidated balance sheets. In addition, we have withheld
$26 million
from our subcontractors at
December 31, 2017
and
2016
related to these questioned costs.
While we continue to believe that the amounts we have invoiced the U.S. government are in compliance with our contract terms and that recovery is probable, we also continue to evaluate our ability to recover these amounts as new information becomes known. As is common in the industry, negotiating and resolving these matters is often an involved and lengthy process, which
sometimes necessitates the filing of claims or other legal action as discussed above. Concurrent with our continued negotiations with the U.S. government, we await the rulings on the filed claims. We are unable to predict when the rulings will be issued or when the matters will be settled or resolved with the U.S. government.
Private Security Contractors ("PSC"s).
Starting in February 2007, we received a series of Form 1s from the Defense Contract Audit Agency ("DCAA") informing us of the U.S. government's intent to deny reimbursement to us under the LogCAP III contract for amounts related to the use of PSCs by KBR and a subcontractor in connection with its work for KBR providing dining facility services in Iraq between 2003 and 2006. The government challenged
$56 million
in billings. The government had previously paid
$11 million
and has withheld payments of
$45 million
, which as of December 31, 2017 we have recorded as due from the government related to this matter in "Claims and accounts receivable" on our consolidated balance sheets.
On June 16, 2014, we received a decision from the ASBCA which agreed with KBR's position (i) that the LogCAP III contract did not prohibit the use of PSCs to provide force protection to KBR or subcontractor personnel, (ii) that there was a need for force protection and (iii) that the costs were reasonable. The ASBCA also found that the Army breached its obligation to provide force protection. Accordingly, we believe that we are entitled to reimbursement by the Army for the amounts charged by our subcontractors, even if they incurred costs for PSCs. The Army appealed the decision.
On June 12, 2017, we received a second ruling from the ASBCA that we are entitled to recover the withheld costs in the approximate amount of
$45 million
plus interest related to the use of PSCs. The Army filed a notice of appeal on October 12, 2017. At this time, we believe the likelihood that we will incur a loss related to this matter is remote, and therefore we have not accrued any loss provisions related to this matter.
Audits
In addition to reviews performed by the U.S. government through the Form 1 process, the negotiation, administration and settlement of our contracts, which primarily consist of DoD contracts, are subject to audit by the DCAA. The U.S. government DCAA serves in an advisory role to the Defense Contract Management Agency ("DCMA") and the DCMA is responsible for the administration of the majority of our contracts. The scope of these audits include, among other things, the validity of direct and indirect incurred costs, provisional approval of annual billing rates, approval of annual overhead rates, compliance with the Federal Acquisition Regulation ("FAR") and Cost Accounting Standards ("CAS"), compliance with certain unique contract clauses and audits of certain aspects of our internal control systems.
As of
December 31, 2017
, the DCAA has completed audits and we have concluded negotiations of both direct and indirect incurred costs for the historical GS activities, including the LOGCAP III contract, through 2011. We have received DCAA audit reports for 2012 and 2014 with minimal amounts of questioned costs. The DCAA has cited 2015 as low risk and therefore accepted our indirect rates as submitted. Based on the information received to date, we do not believe the completed or ongoing government audits on the historical GS activities will have a material adverse impact on our results of operations, financial position or cash flows.
As of
December 31, 2017
, the DCAA has completed audits of incurred direct and indirect costs through 2011 and 2013 and final rates are negotiated through 2010 and 2012 for Wyle and HTSI, respectively. The DCAA has questioned minimal cost for the on-going audits. Based on the information received to date, we do not believe that the completed or on-going audits on the Wyle and HTSI activities will have a material adverse impact on our results of operations, financial position or cash flows.
As a result of the Form 1s, open audits and claims discussed above, we have accrued a reserve for unallowable costs at
December 31, 2017
and
2016
of
$51 million
and
$64 million
, respectively as a reduction to “Claims and accounts receivable” and in “Other liabilities” on our consolidated balance sheet.
Investigations, Qui Tams and Litigation
The following matters relate to ongoing litigation or federal investigations involving U.S. government contracts. Many of these matters involve allegations of violations of the False Claims Act ("FCA"), which prohibits in general terms fraudulent billings to the government. Suits brought by private individuals are called "qui tams." We believe the costs of litigation and any damages that may be awarded in the FKTC, Electrocution, and Burn Pit matters described below are billable under the LogCAP III contract or, as was the case for the Electrocution litigation, covered by insurance, and that any such costs or damages awarded in the Sodium Dichromate matter will continue to be billable under the Restore Iraqi Oil (“RIO”) contract and the related indemnity described below. All costs billed under LogCAP III or RIO are subject to audit by the DCAA.
First Kuwaiti Trading Company arbitration.
In April 2008, First Kuwaiti Trading Company ("FKTC"), one of our LogCAP III subcontractors providing housing containers, filed for arbitration with the American Arbitration Association of all its claims under various LogCAP III subcontracts. After complete hearings on all of FKTC's claims, an arbitration panel awarded FKTC
$17 million
plus interest for claims involving damages on lost or unreturned vehicles. In addition, we determined that we owe FKTC
$32 million
in connection with other subcontracts. We paid FKTC
$19 million
and will pay
$4 million
on pay-when-paid terms in the contract. We have accrued amounts we believe are payable to FKTC in "Accounts payable" and "Other current liabilities" on our consolidated balance sheets. The remaining
$26 million
owed to FKTC under the contract has not been billed to the government and we will not do so until the related claims and disputes between KBR and the government over the FKTC living container contract are resolved (see Department of Justice ("DOJ") False Claims Act complaint - FKTC Containers below). At this time, we believe the likelihood we would incur a loss related to this matter is remote.
Electrocution litigation.
During 2008, a lawsuit was filed against KBR in the Allegheny County Common Pleas Court alleging that the Company was responsible for an electrical incident which resulted in the death of a soldier at the Radwaniyah Palace Complex near Baghdad, Iraq. Plaintiffs claimed unspecified damages for personal injury, death and loss of consortium by the parents. On January 5, 2017 we entered into a confidential settlement agreement with the plaintiffs. This settlement, including the recovery of legal fees, was covered by insurance and did not have a material impact to our financial statements. This matter is now resolved.
Burn Pit litigation.
From November 2008 through current, KBR has been served with in excess of
60
lawsuits in various states alleging exposure to toxic materials resulting from the operation of burn pits in Iraq or Afghanistan in connection with services provided by KBR under the LogCAP III contract. These suits were consolidated in U.S. Federal District Court in Greenbelt, Maryland. The plaintiffs claimed unspecified damages. On January 13, 2017, KBR filed a renewed motion to dismiss and for summary judgment.
On July 19, 2017, the trial court issued its ruling granting KBR's motion to dismiss on jurisdictional ground and for summary judgment. In lengthy fact findings, the Court concluded that the military made all the relevant decisions about the use, location and operation of burn pits. The plaintiffs filed a notice of appeal, and the cases are now pending before the U.S. Court of Appeals for the Fourth Circuit. Briefing was completed in November 2017. The Fourth Circuit has tentatively scheduled oral argument for May 2018. KBR anticipates a ruling by the appellate court in the months that follow the oral argument. At this time, we believe the likelihood that we would incur a loss related to this matter is remote. As of
December 31, 2017
, no amounts have been accrued.
Sodium Dichromate litigation.
From December 2008 through September 2009,
five
cases were filed in various Federal District Courts against KBR by national guardsmen and other military personnel alleging exposure to sodium dichromate at the Qarmat Ali Water Treatment Plant in Iraq in 2003, which were consolidated into one case pending in the U.S. District Court for the Southern District of Texas. The Texas case was then dismissed by the Court on the merits on multiple grounds including the conclusion that no one was injured. In March 2017, the Fifth Circuit Court of Appeals upheld the trial court's dismissal of plaintiffs' claims on summary judgment. The plaintiffs' request for the Texas Supreme Court to hear arguments over the application of certain laws and the application of Texas Supreme Court authority to the plaintiffs' claims was denied in May 2017. Plaintiffs' time to seek review by the U.S. Supreme Court has now passed. The court denied our request for costs. The case is now concluded.
COFC/ASBCA Claims.
During the period of time since the first sodium dichromate litigation was filed, we incurred legal defense costs that we believed were reimbursable under the related U.S. government contract. These costs were billed and claims were filed to recover the associated costs incurred to date. After KBR filed claims for payment, the ASBCA issued an order in August 2015 that KBR is entitled to reimbursement of the sodium dichromate legal fees and any resulting judgments pursuant to the 85-804 indemnity agreement it had with the government. On June 23, 2016, KBR and U.S. Army Corps of Engineers entered into a settlement agreement regarding reimbursement of the
$33 million
in legal fees and interest incurred through the time of the claim. As part of the settlement, all reasonable future defense costs and payment of awards will be reimbursed consistent with the Government's indemnity obligation. This matter is now resolved.
Qui tams.
We have several qui tam cases pending,
one
of which has been joined by the U.S. government (see DOJ False Claims Act complaint - Iraq Subcontractor below). We believe the likelihood that we would incur a loss in the qui tams the U.S. government has not joined is remote and as of
December 31, 2017
, no amounts have been accrued. Costs incurred in defending the qui tams cannot be billed to the U.S. government until those matters are successfully resolved in our favor. If successfully resolved, we can bill
80%
of the costs to the U.S. government under federal regulations. As of
December 31, 2017
, we have incurred and expensed
$12 million
in legal costs to date in defending ourselves in qui tams. There are
two
active cases as discussed below.
Barko qui tam.
Relator Harry Barko, a KBR subcontracts administrator in Iraq for a year in 2004/2005, filed a qui tam lawsuit in June 2005 in the U.S. District Court for the District of Columbia, alleging violations of the False Claims Act ("FCA")
by KBR and KBR subcontractors Daoud & Partners and Eamar Combined for General Trading and Contracting. The DOJ investigated Barko's allegations and elected not to intervene. The claim was unsealed in March of 2009. On March 14, 2017, the Court granted KBR's motion for summary judgment and dismissed the case. The plaintiff has filed a notice of appeal and oral argument on the appeal took place in early December 2017. On December 27, 2017, the Court of Appeals issued its decision confirming the trial court's granting of KBR's motion for summary judgment. While the Relator may file an application for writ of certiorari to the U.S. Supreme Court, we believe the chances of such a writ being granted are minimal. At this time, we believe the likelihood that we would incur a loss related to this matter is remote. As of
December 31, 2017
, no amounts have been accrued.
Howard qui tam.
In March 2011, Geoffrey Howard and Zella Hemphill filed a complaint in the U.S. District Court for the Central District of Illinois alleging that KBR mischarged the government
$628 million
for unnecessary materials and equipment. In October 2014 the Department of Justice declined to intervene and the case was partially unsealed. Discovery is ongoing in this case and is expected to continue into 2019. At this time, we believe the likelihood that we would incur a loss related to this matter is remote. As of
December 31, 2017
, no amounts have been accrued.
DOJ False Claims Act complaint - FKTC Containers.
In November 2012, the U.S. Department of Justice filed a complaint in the U.S. District Court for the Central District of Illinois against KBR, FKTC and others, related to our settlement of delay claims by our subcontractor, FKTC, in connection with FKTC's provision of living trailers for the bed down mission in Iraq in 2003-2004. The DOJ alleged that KBR submitted false claims to the U.S. government for reimbursement of costs for FKTC's services, which the U.S. government alleges were inflated, unverified, not subject to an adequate price analysis and had been contractually assumed by FKTC. Our contractual dispute with the Army over this settlement has been ongoing since 2005. In March 2014, KBR's motion to dismiss was denied and in September 2014, the District Court granted FKTC's motion to dismiss for lack of personal jurisdiction. In December 2017, the DOJ filed a Motion for Voluntary Dismissal of the FKTC False Claims Act case, asking the District Court to dismiss with prejudice all claims in that lawsuit with the exception of the DOJ's alleged breach of contract claim. As to that claim, the motion asked that the dismissal be without prejudice, so that the related contract dispute before the ASBCA discussed below could proceed to completion. The District Court granted the DOJ's motion on December 22, 2017. KBR paid no sums in settlement and will now under LogCAP III contract be able to bill the government 80% of costs incurred in defending this litigation.
KBR Contract Claim on FKTC containers.
KBR previously filed a claim before the ASBCA to recover the costs paid to FKTC to settle its delay and disruption claims. The DCMA had disallowed the majority of those costs. Those contract claims were stayed in 2013 at the request of the DOJ so that they could pursue the FCA case referenced above. On February 19, 2016, the ASBCA, at KBR’s request, lifted the stay and has allowed KBR to proceed with its contract claim for the costs withheld. We tried our contract appeal in September 2017. Post-hearing briefing is complete and we anticipate that the Board will schedule oral argument in the near future.
DOJ False Claims Act complaint - Iraq Subcontractor.
In January 2014, the U.S. Department of Justice filed a complaint in the U.S. District Court for the Central District of Illinois against KBR and two former KBR subcontractors, including FKTC, alleging that
three
former KBR employees were offered and accepted kickbacks from these subcontractors in exchange for favorable treatment in the award and performance of subcontracts to be awarded during the course of KBR's performance of the LogCAP III contract in Iraq. The complaint alleges that as a result of the kickbacks, we submitted invoices with inflated or unjustified subcontract prices, resulting in alleged violations of the FCA and the Anti-Kickback Act. The DOJ's investigation dates back to 2004. We self-reported most of the violations and tendered credits to the U.S. government as appropriate. On May 22, 2014, FKTC filed a motion to dismiss which the U.S. government opposed. Following the submission of our answer in April 2014, the U.S. government was granted a Motion to Strike certain affirmative defenses in March 2015. We do not believe this limits KBR's ability to fully defend all allegations in this matter. As of
December 31, 2017
, we have accrued our best estimate of probable loss related to an unfavorable settlement of this matter in "Other liabilities" on our consolidated balance sheets. At this time, we believe the likelihood that we would incur a loss related to this matter in excess of the amounts we have accrued is remote. Discovery will be ongoing through 2018 and we expect a trial in early 2019.
Note
17
. Other Commitments and Contingencies
Litigation and regulatory matters related to the Company’s restatement of its 2013 annual financial statements
In re KBR, Inc. Securities Litigation
.
Lead plaintiffs, Arkansas Public Employees Retirement System and IBEW Local 58/NECA Funds, sought class action status on behalf of our shareholders, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against the Company, our former chief executive officer, our previous two former chief financial officers, and our former chief accounting officer, arising out of the restatement of our 2013 annual financial statements, and seek undisclosed damages. We reached an agreement to settle this case as of January 11, 2017 and accrued the proposed settlement amount as of December 31, 2016 in "Other current liabilities" on our consolidated balance sheets, net of insurance proceeds, which did not have a material impact on our financial statements. On August 24, 2017, the Court granted final approval of the settlement and terminated the case.
Butorin v. Blount et al
, is a May 2014 shareholder derivative complaint pending in the U.S. District Court of Delaware and filed on behalf of the Company naming certain current and former members of the Company's board of directors as defendants and the Company as a nominal defendant. The complaint alleges that the named directors breached their fiduciary duties by permitting the Company's internal controls to be inadequate. KBR has filed a Motion to Dismiss, to which the derivative plaintiff has responded. At this time, we are not yet able to determine the likelihood of loss, if any, arising from this matter.
We have also received requests for information and a subpoena for documents from the Securities Exchange Commission ("SEC") regarding the restatement of our 2013 annual financial statements. We have been and intend to continue cooperating with the SEC. We have accrued our estimate of a potential settlement in "Other current liabilities" on our consolidated balance sheets which did not have a material impact to our financial statements.
PEMEX and PEP Arbitration
In 2004, we filed for arbitration with the International Chamber of Commerce ("ICC") claiming recovery of damages against PEP, a subsidiary of PEMEX, the Mexican national oil company, related to a 1997 contract between PEP and our subsidiary, Commisa, and PEP subsequently counterclaimed. The project, known as EPC 1, required Commisa to build offshore platforms and treatment and reinjection facilities in Mexico and encountered significant schedule delays and increased costs due to problems with design work, late delivery and defects in equipment, increases in scope and other changes. In 2009, the ICC arbitration panel awarded us a total of approximately
$351 million
including legal and administrative recovery fees as well as interest and PEP was awarded approximately
$6 million
on counterclaims, plus interest on a portion of that sum. In August 2016, the U.S. Court of Appeal for the Second Circuit affirmed a 2013 District Court ruling confirming the ICC award, and PEP filed a Motion for Rehearing in September 2016. PEP posted
$465 million
as security for the judgment, pending exhaustion of all appeals.
On
April 6, 2017
, we entered into a settlement agreement with PEMEX and PEP resolving this dispute. The settlement provided for a cash payment to Commisa of
$435 million
, payment by PEP of all VAT related to the settlement amount and mutual dismissals and releases of all claims related to the EPC 1 project. This matter is now resolved, and all amounts were paid by PEP in April 2017. As a result of the final settlement, we recognized additional revenues and gross profit of
$35 million
during the three months ended June 30, 2017.
Other Matters
Unaoil Investigation.
The DOJ, SEC, and the SFO are conducting investigations of Unaoil, a Monaco based company, in relation to international projects involving several global companies, including KBR, whose interactions with Unaoil are a subject of those investigations. KBR believes it is cooperating with the DOJ, SEC, and the SFO in their investigations, including through the voluntary submission of information and responding to formal document requests.
In re KBR, Inc. Securities Litigation.
On October 20, 2017, lead plaintiffs filed an amended consolidated complaint asserting violations of the federal securities laws in connection with KBR's disclosures associated with the U.K. Serious Fraud Office's ("SFO") investigations of KBR and its affiliates relating to Unaoil. The Company and individual defendants filed a motion to dismiss the lawsuit on December 4, 2017. Briefing on the motion to dismiss was filed on February 19, 2018. At this time we are not yet able to determine the likelihood of loss, if any, arising from this matter.
Tisnado vs DuPont, et al
, In May 2016, KBR was served with a Fourth Amended Petition in Intervention and was brought into a lawsuit which was originally filed on November 14, 2014, in the 11th Judicial District Court of Harris County, Texas. This suit was brought by the family members of persons who died in an incident at the DuPont plant in LaPorte, Texas. KBR has filed an Answer to the Petition, denying the plaintiffs' claims and asserting affirmative defenses. We reached a settlement with the plaintiffs in 2018. This settlement was covered by insurance and did not have a material impact to our financial statements. This matter is now resolved.
Environmental
We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. In the U.S, these laws and regulations include, among others: the Comprehensive Environmental Response, Compensation and Liability Act; the Resources Conservation and Recovery Act; the Clean Air Act; the Clean Water Act; and the Toxic Substances Control Act. In addition to federal and state laws and regulations, other countries where we do business often have numerous environmental regulatory requirements by which we must abide in the normal course of our operations. These requirements apply to our business segments where we perform construction and industrial maintenance services or operate and maintain facilities.
We continue to monitor conditions at sites owned or previously owned. These locations were primarily utilized for manufacturing or fabrication work and are no longer in operation. The use of these facilities created various environmental issues including deposits of metals, volatile and semi-volatile compounds and hydrocarbons impacting surface and subsurface soils and groundwater. The range of remediation costs could change depending on our ongoing site analysis and the timing and techniques used to implement remediation activities. We do not expect that costs related to environmental matters will have a material adverse effect on our consolidated financial position or results of operations. Based on the information presently available to us the assessment and remediation costs associated with all environmental matters is immaterial and we do not anticipate incurring additional costs.
We had been named as a potentially responsible party in various clean-up actions taken by federal and state agencies in the U.S. All of these matters have been settled or resolved and as of
December 31, 2017
we have not been named in any additional matters.
Existing or pending climate change legislation, regulations, international treaties or accords are not expected to have a short-term material direct effect on our business, the markets that we serve or on our results of operations or financial position. However, climate change legislation could have a direct effect on our customers or suppliers, which could impact our business. For example, our commodity-based markets depend on the level of activity of mineral and oil and gas companies and existing or future laws, regulations, treaties or international agreements related to climate change, including incentives to conserve energy or use alternative energy sources, which could impact our business if such laws, regulations, treaties or international agreements reduce the worldwide demand for minerals, oil and natural gas. We will continue to monitor developments in this area.
Leases
We are obligated under operating leases, principally for the use of land, offices, equipment, field facilities and warehouses. We recognize minimum rental expenses over the term of the lease. When a lease contains a fixed escalation of the minimum rent or rent holidays, we recognize the related rent expense on a straight-line basis over the lease term and record the difference between the recognized rental expense and the amounts payable under the lease as deferred lease credits. We have certain leases for office space where we receive allowances for leasehold improvements. We capitalize these leasehold improvements as property, plant and equipment and deferred lease credits. Leasehold improvements are amortized over the shorter of their economic useful lives or the lease term. Total rent expense was
$139 million
,
$154 million
and
$155 million
in
2017
,
2016
and
2015
, respectively. The current portion of deferred rent of
$4 million
and
$4 million
at December 31,
2017
and
2016
, respectively, is recorded in "Other current liabilities" on our consolidated balance sheets and the noncurrent deferred rent of
$99 million
and
$103 million
at December 31,
2017
and
2016
, respectively, is recorded in "Other liabilities" on our consolidated balance sheets.
Future total rental payments on noncancelable operating leases are as follows:
|
|
|
|
|
Dollars in millions
|
Future rental
payments (a)
|
2018
|
$
|
86
|
|
2019
|
$
|
70
|
|
2020
|
$
|
57
|
|
2021
|
$
|
48
|
|
2022
|
$
|
41
|
|
Beyond 2022
|
$
|
263
|
|
|
|
(a)
|
Amounts presented are net of subleases.
|
Insurance Programs
Our employee-related health care benefits program is self-funded. Our workers’ compensation, automobile and general liability insurance programs include a deductible applicable to each claim. Claims in excess of our deductible are paid by the insurer. The liabilities are based on claims filed and estimates of claims incurred but not reported. As of
December 31, 2017
, liabilities for anticipated claim payments and incurred but not reported claims for all insurance programs totaled approximately
$42 million
, comprised of
$8 million
included in "Accrued salaries, wages and benefits,"
$9 million
included in "Other current liabilities" and
$25 million
included in "Other liabilities" all on our consolidated balance sheets. As of
December 31, 2016
, liabilities for unpaid and incurred but not reported claims for all insurance programs totaled approximately
$49 million
, comprised of
$9 million
included in "Accrued salaries, wages and benefits,"
$15 million
included in "Other current liabilities" and
$25 million
included in "Other liabilities" all on our consolidated balance sheets.
Note 18. Ichthys LNG Project
We have a
30%
interest in the JKC JV, which has contracted to perform the engineering, procurement, supply, construction and commissioning of onshore LNG facilities for a client in Darwin, Australia (Ichthys LNG Project). The contract between JKC and its client is a hybrid contract containing both cost-reimbursable and fixed-price (including unit-rate) scopes.
JKC has entered into commercial contracts with multiple suppliers and subcontractors to execute various scopes of work on the project. Certain of these suppliers and subcontractors have made contract claims against JKC for recovery of costs and extensions of time in order to progress the works under the scope of their respective contracts due to a variety of issues related to changes to the scope of work, delays and lower than planned subcontractor productivity. In addition, JKC has incurred costs related to scope increases and other factors, and has made claims to its client for matters for which JKC believes reimbursement is entitled under the contract.
As discussed below, the additional costs associated with these various claims and related issues have been included in determining profit at completion and have resulted in a reduction to our percentage of completion progress for the year ended December 31, 2017. Estimated recoveries associated with the additional change orders, customer claims, and claims against suppliers and subcontractors, which are less than the estimated additional costs, have also been included in determining estimated profit at completion. Further, there are additional claims we believe that we, or our joint venture, is entitled to recover from the client and subcontractors related to additional project costs which have been excluded from estimated revenues at completion as appropriate under U.S. GAAP.
Cost Reimbursable Scope
JKC believes any amounts paid or payable to the suppliers and subcontractors in settlement of their contract claims related to cost-reimbursable scope are an adjustment to the contract price, and accordingly JKC has made claims for contract price adjustments under the reimbursable portion of the contract between JKC and its client. However, the client has disputed some of these contract price adjustments and change orders. Those disputed change orders remain unapproved. In order to facilitate the continuation of work under the contract while we work to resolve this dispute, the client agreed to a contractual mechanism (“Deed of Settlement”) in 2016 providing funding in the form of an interim contract price adjustment to JKC for settlement of subcontractor claims as of that date related to the cost-reimbursable scope. While the client reserved their rights under this funding mechanism, those unapproved change orders have accordingly been paid by the client. JKC in turn settled these subcontractor claims which have been funded through the Deed of Settlement by the client.
If JKC's claims against its client which were funded under the Deed of Settlement remain unresolved by December 31, 2020, JKC will be required to refund sums funded by the client under the terms of the Deed of Settlement. We, along with our joint venture partners, are jointly and severally liable to the client for any amounts required to be refunded. While JKC continues to pursue settlement of these disputes with the client, JKC has initiated proceedings and is planning other arbitrations against the client to resolve these open reimbursable supplier and subcontractor claims prior to December 31, 2020.
Our proportionate share of the total amount of the contract price adjustments under the Deed of Settlement, included in the unapproved change orders and claims related to our unconsolidated affiliates discussed above is
$177 million
for the year ended December 31, 2017.
In September and October 2017, additional change orders pertaining to suppliers and subcontractors under the cost reimbursable portion of the contract were presented to the client. The client funded these change orders, but did not formally approve them as contract price adjustments and have reserved their rights. JKC in turn settled these change orders with the associated suppliers and subcontractors. The formal contract price adjustment for these settlements remained pending at December 31, 2017, but there is no requirement to refund these amounts to the client by a date certain, unlike amounts funded under the Deed of Settlement.
There has been deterioration of paint on certain exterior areas of the plant. The client has requested, and is funding, paint remediation for a portion of the facilities. JKC and its client have not yet resolved what portions of other affected areas will need to be remediated. JKC’s profit estimate at completion includes those revenues and costs for remediation activities that it has been directed to perform and are being funded.
JKC is entitled to an amount of profit and overhead (“TRC Fee”) which is a fixed percentage of the target reimbursable costs ("TRC") under the reimbursable component of the contract which was to be agreed by JKC and its client. At the time of the contract, JKC and its client agreed to postpone the fixing of the TRC until after a specific milestone in the project had been achieved. Although the milestone was achieved, JKC and its client have been unable to reach agreement on the TRC. This matter was taken to arbitration in 2017. A decision was issued in December 2017 which provided some basis for determination of the TRC amount and the TRC Fee. JKC has included an estimate for the TRC Fee in its determination of profit at completion at December 31, 2017 based on the contract provisions and the decision from the December 2017 arbitration.
If the above matters are not resolved for the amounts recorded, or to the extent JKC is unsuccessful in retaining amounts paid to it under the Deed of Settlement and other funding mechanisms used by the Client, we would be responsible for our pro-rata portion of any additional costs and refunded sums in excess of the final adjusted contract price, which could have a material adverse effect on our results of operations, financial position and cash flows. Additionally, to the extent the client does not continue to provide adequate funding for project activities prior to resolution of these matters, the joint venture partners will be required to fund working capital requirements of JKC in the near term which could have a material adverse effect on our financial position and cash flows.
Fixed-Price Scope
Pursuant to JKC's fixed-price scope of its contract with its client, JKC awarded a fixed-price EPC contract to a subcontractor for the design, construction and commissioning of a combined cycle power plant (Power Plant). The subcontractor was a consortium consisting of General Electric and GE Electrical International Inc. and a joint venture between UGL Infrastructure Pty Limited and CH2M Hill (collectively, the "Consortium"). On January 25, 2017, JKC received a Notice of Termination from the Consortium, and the Consortium ceased work on the Power Plant. JKC believes the Consortium breached its contract and repudiated is obligation to complete the Power Plant, plus undertook actions making it more difficult and more costly for the works to be completed by others after the Consortium abandoned the site. Subsequently, the Consortium filed a request for arbitration with the ICC asserting that JKC was in repudiatory breach of the contract. JKC has responded to this request, denying JKC committed any breach of its contract with the Consortium and restated its claim that the Consortium breached and repudiated its contract with JKC and is furthermore liable to JKC for all costs to complete the Power Plant.
JKC prevailed in a legal action against the Consortium requiring the return of materials, drawings and tools following their unauthorized removal from the site. JKC discovered incomplete and defective engineering designs, defective workmanship on the site, missing, underreported and defective materials; and the improper termination of key vendors/suppliers. As a result, project progress claimed by the Consortium was over reported. JKC has evaluated the cost to complete the Consortium's work, which significantly exceeds the awarded fixed-price subcontract value. JKC cost to complete the Power Plant includes re-design efforts, additional materials and significant re-work represent estimated recoveries of claims against suppliers and subcontractors and have been included in JKC's estimate to complete the Consortium's remaining obligations.
JKC is pursuing recourse against the Consortium to recover all of the costs to complete the Power Plant, plus the additional interest, liquidated damages and other related costs, by means inclusive of calling bank guarantees (bonds) and parent guarantees provided by the Consortium partners. Each of the Consortium partners has joint and several liability with respect to all obligations under the subcontract.
The estimated costs to complete the Power Plant have resulted in a reduction to our percentage of completion progress for the year ended December 31, 2017. Estimated costs to complete the Power Plant that have been determined to be probable of recovery from the Consortium under U.S. GAAP have been included as a reduction of cost in our estimate of profit at completion. The estimated recoveries exclude interest, liquidated damages and other related costs which JKC intends to pursue recovery from the Consortium.
On November 30, 2017, JKC made a notification of claim to the Consortium in the amount of
$1.7 billion
for recovery of these expected costs.
To the extent JKC is unsuccessful in prevailing in the Arbitration and in recovering costs to complete the Power Plant, we would be responsible for our pro-rata portion of unrecovered costs from the Consortium. This could have a material adverse impact on the profit at completion of the contract and thus on our consolidated statements of operations, financial position and cash flow. Additionally, to the extent JKC does not resolve this matter with the Consortium in the near term, the joint venture partners will be required to fund JKC's completion of the combined cycle power plant which could have a material adverse effect on our financial position and cash flows.
Our proportionate share of unapproved change orders, customer claims and estimated recoveries of claims against suppliers and subcontractors related to JKC included in determining estimated profit at completion of the contract are included in the amounts disclosed in Note
7
to our consolidated financial statements.
JKC intends to vigorously pursue approval and collection of amounts under all unapproved change orders and claims, as well as resolution of contingencies within reserved amounts with subcontractors and the client. Further, there are additional claims that JKC believes it is entitled to recover from its client and from subcontractors which have been excluded from estimated revenue and profit at completion as appropriate under U.S. GAAP. It is anticipated that these commercial matters may not be resolved in the near term.
Note
19
. Shareholders’ Equity
The following tables summarize our activity in shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
Total
|
|
PIC
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
AOCL
|
|
NCI
|
Balance at December 31, 2014
|
$
|
935
|
|
|
$
|
2,091
|
|
|
$
|
439
|
|
|
$
|
(712
|
)
|
|
$
|
(876
|
)
|
|
$
|
(7
|
)
|
Acquisition of non controlling interest
|
(40
|
)
|
|
(40
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Share-based compensation
|
18
|
|
|
18
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock issued upon exercise of stock options
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Dividends declared to shareholders
|
(47
|
)
|
|
—
|
|
|
(47
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Repurchases of common stock
|
(62
|
)
|
|
—
|
|
|
—
|
|
|
(62
|
)
|
|
—
|
|
|
—
|
|
Issuance of ESPP shares
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
—
|
|
Distributions to noncontrolling interests
|
(28
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(28
|
)
|
Other noncontrolling interests activity
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
Net income
|
226
|
|
|
—
|
|
|
203
|
|
|
—
|
|
|
—
|
|
|
23
|
|
Other comprehensive income, net of tax
|
47
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
45
|
|
|
2
|
|
Balance at December 31, 2015
|
$
|
1,052
|
|
|
$
|
2,070
|
|
|
$
|
595
|
|
|
$
|
(769
|
)
|
|
$
|
(831
|
)
|
|
$
|
(13
|
)
|
Share-based compensation
|
18
|
|
|
18
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Tax benefit decrease related to share-based plans
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Dividends declared to shareholders
|
(46
|
)
|
|
—
|
|
|
(46
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Repurchases of common stock
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
Issuance of ESPP shares
|
3
|
|
|
(1
|
)
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
Distributions to noncontrolling interests
|
(9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9
|
)
|
Net income (loss)
|
(51
|
)
|
|
—
|
|
|
(61
|
)
|
|
—
|
|
|
—
|
|
|
10
|
|
Other comprehensive income (loss), net of tax
|
(219
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(219
|
)
|
|
—
|
|
Balance at December 31, 2016
|
$
|
745
|
|
|
$
|
2,088
|
|
|
$
|
488
|
|
|
$
|
(769
|
)
|
|
$
|
(1,050
|
)
|
|
$
|
(12
|
)
|
Acquisition of non controlling interest
|
(8
|
)
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Share-based compensation
|
12
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Dividends declared to shareholders
|
(45
|
)
|
|
—
|
|
|
(45
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Repurchases of common stock
|
(53
|
)
|
|
—
|
|
|
—
|
|
|
(53
|
)
|
|
—
|
|
|
—
|
|
Issuance of ESPP shares
|
3
|
|
|
(1
|
)
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
Investments by noncontrolling interests
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Distributions to noncontrolling interests
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
Net income
|
442
|
|
|
—
|
|
|
434
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Other comprehensive income (loss), net of tax
|
128
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
129
|
|
|
(1
|
)
|
Balance at December 31, 2017
|
$
|
1,221
|
|
|
$
|
2,091
|
|
|
$
|
877
|
|
|
$
|
(818
|
)
|
|
$
|
(921
|
)
|
|
$
|
(8
|
)
|
Accumulated other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Dollars in millions
|
2017
|
|
2016
|
|
2015
|
Accumulated foreign currency translation adjustments, net of tax of $4, $(2) and $1
|
$
|
(258
|
)
|
|
$
|
(262
|
)
|
|
$
|
(269
|
)
|
Pension and post-retirement benefits, net of tax of $227, $254 and $209
|
(660
|
)
|
|
(785
|
)
|
|
(560
|
)
|
Changes in fair value of derivatives, net of tax of $0, $0 and $0
|
(3
|
)
|
|
(3
|
)
|
|
(2
|
)
|
Total accumulated other comprehensive loss
|
$
|
(921
|
)
|
|
$
|
(1,050
|
)
|
|
$
|
(831
|
)
|
Changes in accumulated other comprehensive loss, net of tax, by component
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
Accumulated foreign currency translation adjustments
|
|
Pension and post-retirement benefits
|
|
Changes in fair value of derivatives
|
|
Total
|
Balance as of December 31, 2015
|
$
|
(269
|
)
|
|
$
|
(560
|
)
|
|
$
|
(2
|
)
|
|
$
|
(831
|
)
|
Other comprehensive income adjustments before reclassifications
|
7
|
|
|
(249
|
)
|
|
—
|
|
|
(242
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
24
|
|
|
(1
|
)
|
|
23
|
|
Balance at December 31, 2016
|
$
|
(262
|
)
|
|
$
|
(785
|
)
|
|
$
|
(3
|
)
|
|
$
|
(1,050
|
)
|
Other comprehensive income adjustments before reclassifications
|
4
|
|
|
100
|
|
|
1
|
|
|
105
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
25
|
|
|
(1
|
)
|
|
24
|
|
Balance at December 31, 2017
|
$
|
(258
|
)
|
|
$
|
(660
|
)
|
|
$
|
(3
|
)
|
|
$
|
(921
|
)
|
Reclassifications out of accumulated other comprehensive loss, net of tax, by component
|
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
December 31, 2017
|
|
December 31, 2016
|
|
Affected line item on the Consolidated Statements of Operations
|
Pension and post-retirement benefits
|
|
|
|
|
|
Amortization of actuarial loss (a)
|
$
|
(31
|
)
|
|
$
|
(29
|
)
|
|
See (a) below
|
Tax benefit (expense)
|
6
|
|
|
5
|
|
|
Provision for income taxes
|
Net pension and post-retirement benefits
|
$
|
(25
|
)
|
|
$
|
(24
|
)
|
|
Net of tax
|
|
|
(a)
|
This item is included in the computation of net periodic pension cost. See Note
13
to our consolidated financial statements for further discussion.
|
Shares of common stock
|
|
|
|
Shares in millions
|
Shares
|
Balance at December 31, 2015
|
175.1
|
|
Common stock issued
|
0.8
|
|
Balance at December 31, 2016
|
175.9
|
|
Common stock issued
|
0.7
|
|
Balance at December 31, 2017
|
176.6
|
|
Shares of treasury stock
|
|
|
|
|
|
|
|
Shares and dollars in millions
|
Shares
|
|
Amount
|
Balance at December 31, 2015
|
33.0
|
|
|
$
|
769
|
|
Treasury stock acquired, net of ESPP shares issued
|
0.1
|
|
|
—
|
|
Balance at December 31, 2016
|
33.1
|
|
|
769
|
|
Treasury stock acquired, net of ESPP shares issued
|
3.4
|
|
|
49
|
|
Balance at December 31, 2017
|
36.5
|
|
|
$
|
818
|
|
Dividends
We declared dividends totaling
$45 million
and
$46 million
in
2017
and
2016
, respectively. As of
December 31, 2017
and
2016
, we had accrued dividends payable of
$11 million
and
$12 million
included in "Other current liabilities" on our consolidated balance sheets.
Note
20
. Share Repurchases
Authorized Share Repurchase Program
On February 25, 2014, our Board of Directors authorized a plan to repurchase up to
$350 million
of our outstanding common shares, which replaced and terminated the August 26, 2011 share repurchase program. As of
December 31, 2017
,
$160 million
remain available for repurchase under this authorization. The authorization does not obligate the Company to acquire any particular number of common shares and may be commenced, suspended or discontinued without prior notice. The share repurchases are intended to be funded through the Company’s current and future cash and the authorization does not have an expiration date.
Share Maintenance Programs
Stock options and restricted stock awards granted under the KBR Stock and Incentive Plan may be satisfied using shares of our authorized but unissued common stock or our treasury share account.
The Employee Stock Purchase Plan ("ESPP") allows eligible employees to withhold up to 10% of their earnings, subject to some limitations, to purchase shares of KBR common stock. These shares are issued from our treasury share account.
Withheld to Cover Program
In addition to the plans above, we also have in place a "withheld to cover" program, which allows us to withhold common shares from employees in connection with the settlement of income tax and related benefit withholding obligations arising from the issuance of share-based equity awards under the KBR, Inc. Stock and Incentive Plan.
The table below presents information on our annual share repurchases activity under these programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31, 2017
|
|
Number of Shares
|
|
Average Price per Share
|
|
Dollars in Millions
|
Repurchases under the $350 million authorized share repurchase program
|
3,310,675
|
|
|
$
|
14.93
|
|
|
$
|
49
|
|
Repurchases under the existing share maintenance program
|
34,691
|
|
|
14.93
|
|
|
1
|
|
Withheld to cover shares
|
190,838
|
|
|
15.57
|
|
|
3
|
|
Total
|
3,536,204
|
|
|
$
|
14.96
|
|
|
$
|
53
|
|
|
|
|
|
|
|
|
Year ending December 31, 2016
|
|
Number of Shares
|
|
Average Price per Share
|
|
Dollars in Millions
|
Repurchases under the $350 million authorized share repurchase program
|
—
|
|
|
n/a
|
|
|
$
|
—
|
|
Repurchases under the existing share maintenance program
|
—
|
|
|
n/a
|
|
|
—
|
|
Withheld to cover shares
|
249,891
|
|
|
14.93
|
|
|
4
|
|
Total
|
249,891
|
|
|
$
|
14.93
|
|
|
$
|
4
|
|
Note
21
. Share-based Compensation and Incentive Plans
Stock Plans
In
2017
,
2016
and
2015
share-based compensation awards were granted to employees under KBR share-based compensation plans.
KBR Stock and Incentive Plan (Amended May 2016)
In November 2006, KBR established the KBR Stock and Incentive Plan ("KBR Stock Plan"), which provides for the grant of any or all of the following types of share-based compensation listed below:
|
|
•
|
stock options, including incentive stock options and nonqualified stock options;
|
|
|
•
|
stock appreciation rights, in tandem with stock options or freestanding;
|
|
|
•
|
restricted stock units;
|
|
|
•
|
cash performance awards; and
|
|
|
•
|
stock value equivalent awards.
|
In May 2012, the KBR Stock Plan was amended to add
2 million
shares of our common stock available for issuance under the KBR Stock Plan and increase certain sublimits.
In May 2016, the KBR Stock Plan was further amended to add
4.4 million
shares of our common stock available for issuance under the KBR Stock Plan. Additionally, this amendment increased the sublimit under the Stock Plan in the form of restricted stock awards, restricted stock unit awards, stock value equivalent awards, or pursuant to performance awards denominated in common stock by
4.4 million
. Under the terms of the KBR Stock Plan,
16.4 million
shares of common stock have been reserved for issuance to employees and non-employee directors. The plan specifies that no more than
9.9 million
shares can be awarded as restricted stock, restricted stock units, stock value equivalents, or pursuant to performance awards denominated in common stock.
At
December 31, 2017
, approximately
6.5 million
shares were available for future grants under the KBR Stock Plan, of which approximately
3.9 million
shares remained available for restricted stock awards or restricted stock unit awards.
KBR Stock Options
Under the KBR Stock Plan, stock options are granted with an exercise price not less than the fair market value of the common stock on the date of the grant and a term no greater than
10
years. The term and vesting periods are established at the discretion of the Compensation Committee at the time of each grant. We amortize the fair value of the stock options over the vesting period on a straight-line basis. Options are granted from shares authorized by our Board of Directors.
The total number of stock options granted and the assumptions used to determine the fair value of granted options in 2015 were as follows:
|
|
|
|
|
|
Year ending
|
|
December 31,
|
KBR stock options assumptions summary
|
2015
|
Granted stock options (shares in millions)
|
1.1
|
|
Weighted average expected term (in years)
|
5.5
|
|
Weighted average grant-date fair value per share
|
$
|
4.91
|
|
There were no stock options granted in 2017 or 2016
|
|
|
|
|
|
|
|
Year ending December 31,
|
KBR stock options range assumptions summary
|
2015
|
|
Range
|
|
Start
|
|
End
|
Expected volatility range
|
33.92
|
%
|
|
39.65
|
%
|
Expected dividend yield range
|
1.15
|
%
|
|
2.13
|
%
|
Risk-free interest rate range
|
1.46
|
%
|
|
2.12
|
%
|
For KBR stock options granted in
2015
, the fair value of options at the date of grant was estimated using the Black-Scholes-Merton option pricing model. The expected volatility of KBR options granted in each year is based upon a blended rate that uses the historical and implied volatility of common stock for KBR. The expected term of KBR options granted was based on KBR's historical experience. The estimated dividend yield is based upon KBR’s annualized dividend rate divided by the market price of KBR’s stock on the option grant date. The risk-free interest rate is based upon the yield of U.S. government issued treasury bills or notes on the option grant date.
The following table presents stock options granted, exercised, forfeited and expired under KBR share-based compensation plans for the year ended
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KBR stock options activity summary
|
Number
of Shares
|
|
Weighted
Average
Exercise Price
per Share
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic Value
(in millions)
|
Outstanding at December 31, 2016
|
2,735,606
|
|
|
$
|
23.81
|
|
|
5.89
|
|
$
|
2.40
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(82,256
|
)
|
|
13.46
|
|
|
|
|
|
Forfeited
|
(42,110
|
)
|
|
16.99
|
|
|
|
|
|
Expired
|
(260,240
|
)
|
|
26.27
|
|
|
|
|
|
Outstanding at December 31, 2017
|
2,351,000
|
|
|
$
|
23.99
|
|
|
4.87
|
|
$
|
4.60
|
|
Exercisable at December 31, 2017
|
2,115,951
|
|
|
$
|
24.81
|
|
|
4.61
|
|
$
|
3.80
|
|
The total intrinsic values of options exercised for the years ended
December 31, 2017
,
2016
and
2015
were
$0.4 million
,
$0.1 million
and
$0.3 million
, respectively. As of
December 31, 2017
, there was
no
unrecognized compensation cost, net of estimated forfeitures, related to non-vested KBR stock options. Stock option compensation expense was
$1 million
in
2017
,
$3 million
in
2016
and
$5 million
in
2015
. Total income tax benefit recognized in net income for share-based compensation arrangements was
$0 million
in
2017
,
$1 million
in
2016
and
$2 million
in
2015
.
KBR Restricted stock
Restricted shares issued under the KBR Stock Plan are restricted as to sale or disposition. These restrictions lapse periodically over a period of time not exceeding 10 years. Restrictions may also lapse for early retirement and other conditions in accordance with our established policies. Upon termination of employment, shares on which restrictions have not lapsed must be returned to us, resulting in restricted stock forfeitures. The fair market value of the stock on the date of grant is amortized and ratably charged to income over the period during which the restrictions lapse on a straight-line basis. For awards with performance conditions, an evaluation is made each quarter as to the likelihood of meeting the performance criteria. Share-based compensation is then adjusted to reflect the number of shares expected to vest and the cumulative vesting period met to date.
The following table presents the restricted stock awards and restricted stock units granted, vested and forfeited during
2017
under the KBR Stock Plan.
|
|
|
|
|
|
|
|
Restricted stock activity summary
|
Number of
Shares
|
|
Weighted
Average
Grant-Date
Fair Value per
Share
|
Nonvested shares at December 31, 2016
|
1,234,518
|
|
|
$
|
16.75
|
|
Granted
|
740,320
|
|
|
15.11
|
|
Vested
|
(635,364
|
)
|
|
18.03
|
|
Forfeited
|
(154,640
|
)
|
|
15.91
|
|
Nonvested shares at December 31, 2017
|
1,184,834
|
|
|
$
|
15.15
|
|
The weighted average grant-date fair value per share of restricted KBR shares granted to employees during
2017
,
2016
and
2015
was
$15.11
,
$13.94
and
$16.66
, respectively. Restricted stock compensation expense was
$11 million
for
2017
,
$15 million
for
2016
and
$13 million
for
2015
. Total income tax benefit recognized in net income for share-based compensation arrangements during
2017
,
2016
and
2015
was
$4 million
,
$5 million
, and
$5 million
, respectively. As of
December 31, 2017
, there was
$11 million
of unrecognized compensation cost, net of estimated forfeitures, related to KBR’s non-vested restricted stock and restricted stock units, which is expected to be recognized over a weighted average period of
1.80
years. The total fair value of shares vested was
$10 million
in
2017
,
$11 million
in
2016
and
$9 million
in
2015
based on the weighted-average fair value on the vesting date. The total fair value of shares vested was
$11 million
in
2017
,
$19 million
in
2016
and
$14 million
in
2015
based on the weighted-average fair value on the date of grant.
Share-based compensation expense
If an award is modified after the grant date, incremental compensation cost is recognized immediately as of the modification. Share-based compensation expense consists of
$3 million
recorded to cost of revenues and
$9 million
to general and administrative expenses on our consolidated statements of operations. The benefits of tax deductions in excess of the compensation cost recognized for the options (excess tax benefits) are classified as additional paid-in-capital, and cash retained as a result of these excess tax benefits is presented in the statements of cash flows as financing cash inflows.