KBR, INC., 10-Q filed on 4/27/2018
Quarterly Report
v3.8.0.1
Document And Entity Information - shares
3 Months Ended
Mar. 31, 2018
Apr. 12, 2018
Document and Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Mar. 31, 2018  
Entity Registrant Name KBR, Inc.  
Entity Central Index Key 0001357615  
Current Fiscal Year End Date --12-31  
Entity Filer Category Large Accelerated Filer  
Entity Common Stock, Shares Outstanding   140,625,084
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q1  
v3.8.0.1
Condensed Consolidated Statements of Operations - USD ($)
shares in Millions, $ in Millions
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Income Statement [Abstract]    
Revenues $ 1,038 $ 1,106
Cost of revenues (957) (1,024)
Gross profit 81 82
Equity in earnings of unconsolidated affiliates 23 9
General and administrative expenses (35) (32)
Acquisition and integration related costs (3) 0
Gain on disposition of assets 0 4
Gain on consolidation of Aspire entities 115 0
Operating income 181 63
Interest expense (6) (5)
Other non-operating expense (2) (7)
Income before income taxes and noncontrolling interests 173 51
Provision for income taxes (34) (13)
Net income 139 38
Net income attributable to noncontrolling interests (1) (1)
Net income attributable to KBR $ 138 $ 37
Net income attributable to KBR per share:    
Basic (usd per share) $ 0.98 $ 0.26
Diluted (usd per share) $ 0.97 $ 0.26
Basic weighted average common shares outstanding (shares) 140 143
Diluted weighted average common shares outstanding (shares) 140 143
Cash dividends declared per share (usd per share) $ 0.08 $ 0.08
v3.8.0.1
Condensed Consolidated Statements of Comprehensive Income (Loss) - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Statement of Comprehensive Income [Abstract]    
Net income $ 139 $ 38
Foreign currency translation adjustments:    
Foreign currency translation adjustments, net of tax (2) 14
Reclassification adjustment included in net income 5 0
Foreign currency translation adjustments, net of taxes of $(1) and $4 3 14
Pension and post-retirement benefits, net of tax:    
Actuarial losses, net of tax 0 0
Reclassification adjustment included in net income 6 6
Pension and post-retirement benefits, net of taxes of $(1) and $(2) 6 6
Other comprehensive income, net of tax 9 20
Comprehensive income 148 58
Less: Comprehensive income attributable to noncontrolling interests (1) (1)
Comprehensive income attributable to KBR $ 147 $ 57
v3.8.0.1
Condensed Consolidated Statements of Comprehensive Income (Loss) (Parenthetical) - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Accumulated Other Comprehensive Income (Loss), taxes [Abstract]    
Foreign currency translation, tax $ (1) $ 4
Pension and post-retirement benefits, tax $ (1) $ (2)
v3.8.0.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Millions
Mar. 31, 2018
Dec. 31, 2017
Current assets:    
Cash and equivalents $ 486 $ 439
Accounts receivable, net of allowance for doubtful accounts of $12 and $12 810 510
Contract assets 235 383
Other current assets 102 93
Total current assets 1,633 1,425
Claims and accounts receivable 106 101
Property, plant, and equipment, net of accumulated depreciation of $336 and $329 (including net PPE of $43 and $34 owned by a variable interest entity) 142 130
Goodwill 1,011 968
Intangible assets, net of accumulated amortization of $128 and $122 486 239
Equity in and advances to unconsolidated affiliates 566 387
Deferred income taxes 289 300
Other assets 131 124
Total assets 4,364 3,674
Current liabilities:    
Accounts payable 475 350
Contract liabilities 502 368
Accrued salaries, wages and benefits 186 186
Nonrecourse project debt 11 10
Other current liabilities 146 157
Total current liabilities 1,320 1,071
Pension obligations 392 391
Employee compensation and benefits 102 118
Income tax payable 86 85
Deferred income taxes 81 18
Nonrecourse project debt 29 28
Revolving credit agreement 540 470
Deferred income from unconsolidated affiliates 0 101
Other liabilities 183 171
Total liabilities 2,733 2,453
KBR shareholders’ equity:    
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and outstanding 0 0
Common stock, $0.001 par value 300,000,000 shares authorized,177,169,755 and 176,638,882 shares issued, and 140,624,668 and 140,166,589 shares outstanding 0 0
Paid-in capital in excess of par (PIC) 2,094 2,091
Accumulated other comprehensive loss (912) (921)
Retained earnings 1,148 877
Treasury stock, 36,545,087 shares and 36,472,293 shares, at cost (818) (818)
Total KBR shareholders’ equity 1,512 1,229
Noncontrolling interests 119 (8)
Total shareholders’ equity 1,631 1,221
Total liabilities and shareholders’ equity $ 4,364 $ 3,674
v3.8.0.1
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Millions
Mar. 31, 2018
Dec. 31, 2017
Receivables:    
Allowance for doubtful accounts $ 12 $ 12
Property, plant, and equipment:    
Accumulated depreciation 336 329
PP&E owned by a VIE, net 43 34
Intangibles:    
Accumulated amortization $ 128 $ 122
KBR shareholders’ equity:    
Preferred stock, par value (usd per share) $ 0.001 $ 0.001
Preferred stock, shares authorized (shares) 50,000,000 50,000,000
Preferred stock, shares issued (shares) 0 0
Preferred stock, shares outstanding (shares) 0 0
Common stock, par value (usd per share) $ 0.001 $ 0.001
Common stock, shares authorized (shares) 300,000,000 300,000,000
Common stock, shares issued (shares) 177,169,755 176,638,882
Common stock, shares outstanding (shares) 140,624,668 140,166,589
Treasury stock, shares (shares) 36,545,087 36,472,293
v3.8.0.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Cash flows from operating activities:    
Net income $ 139 $ 38
Adjustments to reconcile net income to net cash provided by (used in) operating activities:    
Depreciation and amortization 13 13
Equity in earnings of unconsolidated affiliates (23) (9)
Deferred income tax expense 25 5
Gain on consolidation of Aspire entities (115) 0
Other 11 6
Changes in operating assets and liabilities:    
Accounts receivable, net of allowance for doubtful accounts (134) 38
Contract assets (44) 4
Accounts payable 63 (75)
Contract liabilities (32) (124)
Accrued salaries, wages and benefits 2 16
Reserve for loss on uncompleted contracts (3) (22)
Payments from unconsolidated affiliates, net 1 1
Distributions of earnings from unconsolidated affiliates 1 14
Income taxes payable 12 6
Pension funding (10) (9)
Subcontractor advances (1) 0
Net settlement of derivative contracts 3 (2)
Other assets and liabilities (38) (15)
Total cash flows used in operating activities (130) (115)
Cash flows from investing activities:    
Purchases of property, plant and equipment (9) (3)
Payments for investments in equity method joint ventures (72) 0
Acquisition of businesses, net of cash acquired 0 2
Increase in cash due to consolidation of Aspire entities 205 0
Other 1 0
Total cash flows provided by (used in) investing activities 125 (1)
Cash flows from financing activities:    
Payments to reacquire common stock (2) (2)
Acquisition of noncontrolling interest (6) 0
Distributions to noncontrolling interests 0 (1)
Payments of dividends to shareholders (11) (12)
Borrowings on revolving credit agreement 70 0
Other 0 0
Total cash flows provided by (used in) financing activities 51 (15)
Effect of exchange rate changes on cash 1 5
Increase (decrease) in cash and equivalents 47 (126)
Cash and equivalents at beginning of period 439 536
Cash and equivalents at end of period 486 410
Supplemental disclosure of cash flows information:    
Cash paid for interest 3 6
Cash paid for income taxes (net of refunds) 4 3
Noncash financing activities    
Dividends declared $ 11 $ 12
v3.8.0.1
Description of Company And Significant Accounting Policies
3 Months Ended
Mar. 31, 2018
Accounting Policies [Abstract]  
Description of Company and Significant Accounting Policies 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 condensed 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 condensed 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.

Amounts classified as "Costs and estimated earnings in excess of billings on uncompleted contracts" and "Billings in excess of costs and estimated earnings on uncompleted contracts" on the consolidated balance sheets of our Annual Report on Form 10-K for the year ended December 31, 2017 have been reclassified as "Contract assets" and "Contract liabilities" on the condensed consolidated balance sheets.

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.

Segment Reorganization

We are changing the name of our Engineering & Construction segment to the "Hydrocarbons Services" segment. This change reflects strategic shifts we have made in this business over recent years to evolve to more recurring and reimbursable engineering, consulting and industrial maintenance services, coupled with our de-emphasis in engaging in fixed price EPC projects except for those that fit within our commercial discipline.

Effective January 1, 2018, we changed the structure of our internal organization in a manner that caused our consulting business to be moved from the Technology & Consulting business segment to the Hydrocarbons Services (formerly E&C) business segment. As of January 1, 2018, our segments consist of the following five reportable segments:

Government Services
Technology
Hydrocarbons Services
Non-Strategic Business
Other

See Note 3 to our condensed consolidated financial statements for further discussion on our segments. We have presented our segment results reflecting these changes for all periods presented. In conjunction with the change in segments, the Company evaluated its goodwill associated with the technology and consulting reporting units using Level 3 fair value inputs, and no impairment indicators were identified.

Use of Estimates

The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed 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 but are not limited to the following:

project revenues, costs and profits on engineering and construction contracts, including recognition of estimated losses on uncompleted contracts
project revenues, award fees, costs and profits on government services contracts
provisions for uncollectible receivables
provisions for client claims and recoveries of costs from subcontractors, vendors and others
provisions for income taxes and related valuation allowances and tax uncertainties
recoverability of goodwill
recoverability of other intangibles and long-lived assets and related estimated lives
recoverability of equity method and cost method investments
valuation of pension obligations and pension assets
accruals for estimated liabilities, including litigation accruals
consolidation of VIEs
valuation of share-based compensation
valuation of assets and liabilities acquired in business combinations

In accordance with normal practice in the construction industry, we include in current assets and current liabilities certain 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 condensed consolidated financial statements.

Adoption of New Accounting Standards

ASU 2014-09, Revenue from Contracts with Customers, codified as ASC Topic 606. On January 1, 2018, we adopted ASC Topic 606 and the related amendments ("ASC 606") using the modified retrospective method applied to those contracts which were not completed as of December 31, 2017. Results for operating periods beginning after January 1, 2018 are presented under ASC 606, while comparative information has not been restated and continues to be reported in accordance with the accounting standards in effect for those periods. See Note 2 for a description of our accounting policy resulting from adoption of ASC 606.

We recognized the cumulative effect of initially applying ASC 606 as an adjustment to retained earnings in the balance sheet as of January 1, 2018 as follows:
 
Balance at
 
Adjustments Due to
 
Balance at
Dollars in millions
December 31, 2017
 
ASC 606
 
January 1, 2018
Assets
 
 
 
 
 
Accounts receivable
$
510

 
$
157

 
$
667

Contract assets
383

 
(191
)
 
192

Other current assets
93

 
5

 
98

Equity in and advances to unconsolidated affiliates
387

 
87

 
474

Deferred income taxes
300

 
(6
)
 
294

Other assets
124

 
1

 
125

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Contract liabilities
368

 
9

 
377

Deferred income from unconsolidated affiliates
101

 
(101
)
 

Other liabilities
171

 
1

 
172

 
 
 
 
 
 
Equity
 
 
 
 
 
Retained Earnings
877

 
144

 
1,021



The impact of adoption on our consolidated statement of operations, balance sheet and cash flows for the period ended March 31, 2018 was as follows:
 
For the period ended March 31, 2018
 
As
 
Balances Without
 
Effect of Change
Dollars in millions
Reported
 
Adoption of ASC 606
 
Higher/(Lower)
Statement of Operations
 
 
 
 
 
Revenues
$
1,038

 
$
1,036

 
$
2

Income before income taxes and noncontrolling interests
173

 
172

 
1

Net income
139

 
138

 
1

 
 
 
 
 
 
EPS
 
 
 
 
 
Basic
$
0.98

 
$
0.97

 
$
0.01

Diluted
$
0.97

 
$
0.97

 
$


 
As of March 31, 2018
 
As
 
Balances Without
 
Effect of Change
Dollars in millions
Reported
 
Adoption of ASC 606
 
Higher/(Lower)
Assets
 
 
 
 
 
Accounts receivable
$
810

 
$
601

 
$
209

Contract assets
235

 
446

 
(211
)
Other current assets
102

 
98

 
4

Equity in and advances to unconsolidated affiliates
566

 
562

 
4

Deferred income taxes
289

 
296

 
(7
)
 
 
 
 
 
 
Liabilities
 
 
 
 
 
Contract liabilities
502

 
550

 
(48
)
Deferred income from unconsolidated affiliates

 
104

 
(104
)
 
 
 
 
 
 
Equity
 
 
 
 
 
Retained earnings
1,148

 
1,000

 
148

Accumulated other comprehensive loss
(912
)
 
(915
)
 
3


 
For the period ended March 31, 2018
 
As
 
Balances Without
 
Effect of Change
Dollars in millions
Reported
 
Adoption of ASC 606
 
Higher/(Lower)
Cash flows from operating activities
 
 
 
 
 
Net income
$
139

 
$
138

 
$
1

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Equity in earnings of unconsolidated affiliates
(23
)
 
(23
)
 

Deferred income tax (benefit) expense
25

 
25

 

 
 
 
 
 
 
Changes in operating assets and liabilities, net of acquired businesses:
 
 
 
 
 
Accounts receivable, net of allowances for doubtful accounts
(134
)
 
74

 
(208
)
Contract assets
(44
)
 
(255
)
 
211

Contract liabilities
(32
)
 
(28
)
 
(4
)
Other assets and liabilities
(38
)
 
(38
)
 

Total cash flows used in operating activities
(130
)
 
(130
)
 


The impacts of adoption were primarily related to: (1) conforming our contracts recorded over time from previously acceptable methods to the cost-to-cost percentage of completion methodology, (2) combining certain deliverables that were previously considered separate deliverables into a single performance obligation as defined by ASC 606, and (3) separating certain contracts that were previously considered one deliverable into multiple performance obligations.

The impacts of adoption on our opening balance sheet were primarily related to: reclassification of amounts between "Accounts receivable, net of allowance for doubtful accounts" and "Contract assets" based on whether an unconditional right to consideration has been established or not, and the deferral of costs incurred and payments received to fulfill a contract which were previously recorded in income in the period incurred or received but under the new standard will generally be capitalized and amortized over the period of contract performance.

In connection with the consolidation of certain previously unconsolidated VIEs associated with the Aspire Defence project in the first quarter of 2018, we elected to early adopt ASC 606 for each of the Aspire Defence project joint ventures effective January 1, 2018. As a result of the adoption by the Aspire Defence Limited joint ventures, we identified multiple performance obligations associated with the project deliverables that were previously accounted for as a single deliverable under its contract with the MoD. In addition to the above impacts of adoption on revenue and gross margin, the cumulative effect of the adoption by Aspire Defence Limited resulted in sufficient additional income that had been previously recorded as "Deferred income from unconsolidated affiliates" on our condensed consolidated balance sheets in the amount of $101 million which was reversed and included in the cumulative effect adjustment. Also, deferred construction income in the amount of $87 million previously recorded in "Equity in and advance to unconsolidated affiliates" was reversed and included in the cumulative effect adjustment as a result of the early adoption of ASC 606 by the Aspire Defence project joint ventures. See Note 12 for further discussion of the Aspire Defence project. Except for the Aspire Defence project joint ventures, we have availed the SEC exemption relating to deferring the application of ASC Topic 606 to our remaining unconsolidated joint ventures until January 1, 2019.



Additional Balance Sheet Information

Other Current Liabilities

The components of "Other current liabilities" on our condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017 are presented below:
 
March 31,
 
December 31,
Dollars in millions
2018
 
2017
Reserve for estimated losses on uncompleted contracts (a)
$
12

 
$
15

Retainage payable
31

 
30

Income taxes payable
23

 
17

Restructuring reserve
7

 
9

Taxes payable not based on income
10

 
11

Value-added tax payable
14

 
13

Insurance payable
3

 
9

Dividend payable
11

 
11

Other miscellaneous liabilities
35

 
42

Total other current liabilities
$
146

 
$
157

 
(a)
See Note 3 to our condensed consolidated financial statements for further discussion on significant reserves for estimated losses on uncompleted contracts.

Other Liabilities

Included in "Other liabilities" on our condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017 is noncurrent deferred rent of $97 million and $99 million, respectively. Also included in "Other liabilities" is a payable to our former parent of $5 million as of March 31, 2018 and December 31, 2017, respectively.
v3.8.0.1
Significant Accounting Policies
3 Months Ended
Mar. 31, 2018
Accounting Policies [Abstract]  
Significant Accounting Policies Significant Accounting Policies

Our significant accounting policies are detailed in "Note 1. Description of Company and Significant Accounting Policies" of our Annual Report on Form 10-K for the year ended December 31, 2017. The following section includes revised accounting policies related to the adoption of ASC Topic 606 and the separate presentation of acquisition and integration related costs.

Revenue Recognition

Revenue is measured based on the amount of consideration specified in a contract with a customer. Revenue is recognized when and as our performance obligations under the terms of the contract are satisfied which generally occurs with the transfer of control of the goods or services to the customer.

To determine the proper revenue recognition method for contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate a combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. Contracts are considered to have a single performance obligation if the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts, which is mainly because we provide a significant service of integrating a complex set of tasks and components into a single project or capability. Contracts that cover multiple phases of the product lifecycle (development, construction and maintenance & support) are typically considered to have multiple performance obligations even when they are part of a single contract.

For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. In cases where we do not provide the distinct good or service on a standalone basis, the primary method used to estimate standalone selling price is the expected
cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service.

We provide product warranties to customers that are included in the sale and are not priced or sold separately or do not provide customers with a service in addition to assurance of compliance with agreed-upon specifications. We do not consider these types of warranties to be separate performance obligations.

The following is a description of the principal activities from which we generate revenues by reportable segment:

Government Services

For most of government services, the customer contracts with us to provide support solutions to defense, space, aviation and other programs and missions through long-term service contracts. The performance obligations related to these long-term service contracts are primarily created through the issuance of task orders by the customer because a service contract generally does not meet the criteria to be considered a contract under ASC 606 since it does not obligate the customer to issue any task orders and could be canceled without substantive penalty under termination for convenience clauses. Accordingly, each task order releases us to perform specific portions of the overall scope in the service contract and is typically accounted for as a separate contract because the task order establishes the enforceable rights and obligations, and payment terms. Task orders can include option periods that may be approved by the customer at a later date depending on the customer's future needs and budget availability.

Many of our government services contracts include variable consideration consisting of base fees (a profit percentage applied to our cost) or award fees (additional consideration based on performance criteria, subject to final customer approval). Variable consideration can also arise from modifications to the scope of services resulting in unapproved change orders or customer claims. Variable consideration is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on assessments of legal enforceability, our performance, and all information (historical, current, and forecasted) that is reasonably available to us.

Many of our government services contracts are for labor at agreed per hour rates on a cost reimbursable basis to the customer. These contracts are accounted for as a series of distinct services because the labor is provided as a continuous service, each time increment of labor provided is distinct, the nature of the services provided is substantially the same, and the pattern of transfer is the same. In this type of contract, the entire amount of consideration is recognized as labor is provided.

We also enter into base operations support contracts to provide the resources to operate bases, installations, camps, and stations of military departments. Our base operations support contracts are either fixed price contracts or cost reimbursable contracts. For fixed price contracts, we recognize a fixed monthly fee as revenue as services are provided because the base operations represent a series of distinct services and our level of effort remains substantially the same from month to month. For cost reimbursable contracts, we bill the customer all direct costs incurred each month plus an agreed provisional rate for overhead and fee. Overhead and fee are finalized at a later date. For the purpose of revenue recognition of the variable elements of the contracts, we apply the variable consideration considerations described above.

Revenue on our other types of government services contracts is primarily recognized over time using the cost-to-cost input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress because it best depicts the transfer of assets to the customer which occurs as we incur costs on the contracts. Contract costs include actual direct project costs incurred and an allocation of our indirect costs.

Under the typical payment terms of our government services contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones.

Hydrocarbons Services

For most of our hydrocarbons services projects, the customer contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability and are therefore accounted for as single performance obligations.

It is common for our hydrocarbons services contracts to contain incentive fees, performance bonuses, penalties (liquidated damages) or other provisions, including claims and change orders, that may either increase or decrease the transaction price.
Incentives and other performance bonuses generally are awarded upon achievement of certain performance metrics, program milestones or cost targets. Liquidated damage penalties in our contracts are generally capped at a percentage of the contract value. Liquidated damages may be related to schedule delays, typically calculated based on a daily rate, or tied to performance guarantees.

Substantially all of our performance obligations related to hydrocarbons services contracts are satisfied over time as work progresses. Typically, revenue is recognized over time using the cost-to-cost input measure to measure progress because it best depicts the transfer of goods and services to the customer which occurs as we incur costs on our contracts. 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.

Under the typical payment terms of our hydrocarbons services contracts, the customer makes advance payments as well as interim payments as work progresses. The advance payment generally is not considered a significant financing component as we normally expect to recognize the advance payments in revenue within a year of receipt as work progresses on the related performance obligation.

Technology

Our technology contracts consist primarily of licensing, basic engineering design (together, the "LBED"), proprietary equipment ("PEQ") or catalyst contracts. LBED contracts are combined into one performance obligation as they are entered into at the same time and the licensed technology requires engineering and design. We may further combine LBED and PEQ contracts into one performance obligation if the contracts were negotiated as a package with a single commercial objective, and the customer contracts with us to provide a significant service of integrating these distinct goods and services into a single project or capability.

It is common for our technology contracts to contain variable consideration including contingent milestone payments and penalties (liquidated damages) that may increase or decrease the transaction price. Contingent milestone payments are primarily related to decisions made by the customer after LBED has been completed, such as go or no-go decision on the project. Liquidated damage penalties in our technology contracts are typically calculated based on a weekly rate and are capped at a percentage of the contract value.

Substantially all of our performance obligations related to technology contracts are satisfied over time as work progresses. Typically, revenue is recognized over time using the cost-to-cost input measure to measure progress because it best depicts the transfer of assets to the customer which occurs as we incur costs on our contracts. Contract costs include all direct material and labor costs and those indirect costs related to contract performance and are recognized as the performance obligation is satisfied.

Under the typical payment terms of our technology contracts, the customer makes advance payments as well as interim payments as work progresses and certain progress milestones are met. The advance payment generally is not considered a significant financing component as we normally expect to recognize the advance payments in revenue within a year of receipt as work progresses on the related performance obligation.

Contract Estimates

Contract Modifications

Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment.

As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly through a Company-wide disciplined project review process in which management reviews the progress and execution of our performance obligations and the estimate at completion (EAC). As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule and the related changes in estimates of revenues and costs. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials, the performance of subcontractors, and the availability and timing of funding from the customer, among other variables.

We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the period it is identified.

Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from existing contracts due to the significant integration provided in the context of the contract and are accounted for as if they were part of the original contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.

We account for contract modifications as a separate contract when the modification results in the promise to deliver additional goods or services that are distinct and the increase in price of the contract is for the same amount as the stand-alone selling price of the additional goods or services included in the modification.

We estimate variable consideration at the most likely amount to which we expect to be entitled. Any variable consideration is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on assessments of legal enforceability, our performance, and all information (historical, current, and forecasted) that is reasonably available to us.

We allocate variable consideration entirely to a performance obligation or to a distinct good or service within a performance obligation if it relates specifically to our efforts to satisfy the performance obligation or transfer the distinct good or service, and the allocation depicts the amount of consideration to which we expect to be entitled.

Claims Against Vendors and Subcontractors

We include claims to vendors, subcontractors and others as a receivable and a reduction in recognized costs when enforceability of the claim is established by the contract and the amounts are reasonably estimable and probable of being recovered. The amounts are recorded up to the extent of the lesser of the amounts management expects to recover or to costs incurred.

Our net revenue recognized from performance obligations satisfied in previous periods was immaterial to our financial statements for the three month period ended March 31, 2018.

On March 31, 2018, we had $9.9 billion of transaction price allocated to remaining performance obligations. We expect to recognize approximately 25% of our remaining performance obligations as revenue within one year and the balance thereafter. Revenue associated with our remaining performance obligations to be recognized beyond one year includes performance obligations related to Aspire Defence and Fasttrax projects, which have contract terms extending through 2041 and 2023, respectively. The balance of remaining performance obligations does not include variable consideration that was determined to be constrained as of March 31, 2018.

Accounts receivable

Accounts receivable are recorded based on contracted prices when we obtain an unconditional right to payment under the terms of our contracts.

We establish an allowance for doubtful accounts based on the assessment of our 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.

Contract assets and liabilities

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 cost-to-cost method of revenue recognition. Contract assets include unbilled amounts typically resulting from revenue under long-term contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer, and right to payment is not unconditional. Contract liabilities consist of advance payments and billings in excess of revenue recognized and deferred revenue.

Retainage, included in contract assets, represents the 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 excludes amounts withheld by the U.S. government on certain contracts. See Notes 10 and 16 to our condensed consolidated financial statements for our discussion on U.S. government receivables.

Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. We classify advance payments and billings in excess of revenue recognized as current and deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. The noncurrent portion of deferred revenue is included in "Other liabilities" in our condensed consolidated balance sheets.

Acquisition and integration related costs

Acquisition and integration related costs consist of third party transaction expenses representing legal, consulting and investment banking-related costs that are direct, incremental costs incurred prior to the closing of an acquisition and costs incurred to integrate the operations of newly acquired businesses into the Company's existing infrastructure as well as other initiatives to combine the newly merged companies into new infrastructure.
v3.8.0.1
Business Segment Information
3 Months Ended
Mar. 31, 2018
Segment Reporting [Abstract]  
Business Segment Information Business Segment Information

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 hydrocarbons services. 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.  Our business segments are described below:
Government Services. 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 recent acquisitions, as described in Note 5 to our condensed consolidated financial statements, have been combined with our existing U.S. operations within this business segment and operate under the single "KBRwyle" brand.

Technology. Our Technology business segment combines KBR's proprietary technologies, equipment and catalyst supply and associated knowledge-based services into a global business for refining, petrochemicals, inorganic and specialty chemicals as well as gasification, syngas, ammonia, nitric acid and fertilizers. From early planning through scope definition, advanced technologies and project lifecycle support, KBR's Technology segment works closely with customers to provide the optimal approach to maximize their return on investment.
Hydrocarbons Services. Our HS business segment provides comprehensive project and program delivery capability globally. Our key capabilities leverage our operational and technical excellence as a global provider of EPC for onshore oil and gas; LNG/GTL; oil refining; petrochemicals; chemicals; fertilizers; offshore oil and gas (shallow-water, deep-water and subsea); floating solutions (FPUs, FPSO, FLNG & FSRU); maintenance services (via the “Brown & Root Industrial Services” brand); and consulting services provided under our three specialist consulting brands, Granherne, Energo and GVA.
Non-strategic Business. Our Non-strategic Business segment represents the operations or activities that we intend to exit upon completion of existing contracts. All Non-Strategic Business projects are substantially complete. 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 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. 

The following table presents revenues, gross profit (loss), equity in earnings of unconsolidated affiliates, and operating income (loss) by reporting segment. The prior year balances have been recast to reflect the change in segments as described in Note 1 to our condensed consolidated financial statements.
Operations by Reportable Segment
 
Three Months Ended
 
March 31,
Dollars in millions
2018
 
2017
Revenues:
 
 
 
Government Services
$
677

 
$
515

Technology
62

 
66

Hydrocarbons Services
299

 
499

Subtotal
1,038

 
1,080

Non-strategic Business

 
26

Total revenues
$
1,038

 
$
1,106

Gross profit (loss):
 
 
 
Government Services
$
52

 
$
37

Technology
16

 
14

Hydrocarbons Services
15

 
33

Subtotal
83

 
84

Non-strategic Business
(2
)
 
(2
)
Total gross profit (loss)
$
81

 
$
82

Equity in earnings of unconsolidated affiliates:
 
 
 
Government Services
$
8

 
$
9

Technology

 

Hydrocarbons Services
15

 

Subtotal
23

 
9

Non-strategic Business

 

Total equity in earnings of unconsolidated affiliates
$
23

 
$
9

Segment operating income (loss):
 
 
 
Government Services
$
172

 
$
40

Technology
15

 
13

Hydrocarbons Services
23

 
32

Other
(27
)
 
(20
)
Subtotal
183

 
65

Non-strategic Business
(2
)
 
(2
)
Total segment operating income (loss)
$
181

 
$
63


 

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 sometimes 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 were as follows:

Hydrocarbons Services

There were no significant changes in project-related estimates during the three months ended March 31, 2018. We recognized changes to equity earnings as a result of various changes to estimates on the Ichthys LNG project during the three months ended March 31, 2017. See Notes 9 and 18 for a discussion of the matters impacting this project.

During 2016, we experienced weather delays as well as construction productivity rates less than previously expected on a downstream EPC project in the U.S. These issues delayed estimated completion of the project until 2018, which resulted in additional estimated costs to complete and recognition of liquidated damages which caused this project to become a loss project in the fourth quarter of 2016. There were no significant changes in estimated losses on this project during the three months ended March 31, 2018 or 2017. Included in the reserve for estimated losses on uncompleted contracts is $5 million and $9 million as of March 31, 2018 and December 31, 2017, respectively, related to this project. The EPC project was 94% complete as of March 31, 2018. 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 March 31, 2018.
v3.8.0.1
Revenue
3 Months Ended
Mar. 31, 2018
Revenue from Contract with Customer [Abstract]  
Revenue Revenue

We disaggregate our revenue from customers by type of service, geographic destination and contract type for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. See details in the tables below.

Revenue by Service/Product line was as follows:
 
Three Months Ended
 
March 31,
Dollars in millions
2018
By Service / Product Types
 
     Government Services
 
          Science and Space
$
78

          Engineering
252

          Logistics
347

     Total Government Services
677

 
 
     Hydrocarbons
 
          Technology
62

 
 
          Hydrocarbons Services
 
               Onshore
238

               Offshore
24

               Industrial Services
23

               Consulting
14

          Total Hydrocarbons Services
299

 
 
     Total Hydrocarbons
361

 
 
Total net revenue
$
1,038


Government Services revenue earned from key U.S. Government customers including U.S. DoD agencies and NASA was $492 million for the three months ended March 31, 2018. Government Services revenue earned from non-U.S. Government customers including the U.K. MoD, the Australian Defence Force and others was $185 million for the three months ended March 31, 2018.
  
Revenue by geographic destination was as follows:
 
Three Months Ended March 31, 2018
 
 
 
Hydrocarbons
 
 
Total by Countries/Regions (a)
Dollars in millions
Government Services
 
Technology
 
Hydrocarbons Services
 
Total
     United States
$
314

 
$
6

 
$
126

 
$
446

     Middle East
165

 
7

 
30

 
202

     Europe
156

 
8

 
46

 
210

     Australia
13

 
1

 
72

 
86

     Canada

 
2

 
11

 
13

     Africa
18

 
7

 
2

 
27

     China

 
21

 

 
21

     Other countries
11

 
10

 
12

 
33

Total net revenue
$
677

 
$
62

 
$
299

 
$
1,038

(a) Revenues by country/region are determined based on the location where goods and services are provided.

Many of our contracts contain both fixed price and cost reimbursable components. We define contract type based on the component that represents the majority of the contract. Revenue by contract type was as follows:
 
Three Months Ended March 31, 2018
 
 
 
Hydrocarbons
 
 
Dollars in millions
Government Services
 
Technology
 
Hydrocarbons Services
 
Total
     Fixed Price
$
218

 
$
59

 
$
56

 
$
333

     Cost Reimbursable
459

 
3

 
243

 
705

Total net revenue
$
677

 
$
62

 
$
299

 
$
1,038

v3.8.0.1
Acquisitions, Dispositions and Other Transactions
3 Months Ended
Mar. 31, 2018
Business Combinations [Abstract]  
Acquisitions, Dispositions and Other Transactions Acquisitions, Dispositions and Other Transactions

Sigma Bravo Pty Ltd Acquisition

During the fourth quarter of 2017, we acquired 100% of the outstanding common shares of Sigma Bravo Pty Ltd ("Sigma Bravo"). Sigma Bravo provides information management, technical support and training 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 second quarter of 2018. Accordingly, adjustments to the initial purchase accounting for the acquired net assets will likely be completed during the second quarter of 2018. This acquisition is reported within our Government Services business segment.

Consolidation of Aspire Defence Subcontracting Joint Ventures

We acquired control of the Aspire Defence subcontracting joint ventures as a result of Carillion plc ("Carillion") entering into compulsory liquidation on January 15, 2018. See Note 12 to our condensed consolidated financial statements for further discussion regarding these entities.

Subsequent Event

On April 25, 2018, we acquired 100% of the outstanding stock of Stinger Ghaffarian Technologies ("SGT"). Aggregate consideration for the acquisition was $355 million, subject to certain working capital and other purchase price adjustments set forth in the purchase asgreement. SGT is a leading provider of high-value engineering, mission operations, scientific and IT software solutions in the government services market. We funded the acquisition with borrowings under our new Senior Secured Credit Facilities that were entered into concurrently with the acquisition. See Note 14 to our condensed consolidated financial statements for information related to our new Senior Secured Credit Facilities. We recognized costs related to this acquisition of $2 million during the three months ended March 31, 2018, which are included in "Acquisition and integration related costs" on the condensed consolidated statements of operations.

We will account for this transaction using the acquisition method under ASC 805, Business Combinations. Due to the limited time since the acquisition date, we have not completed the initial accounting for the acquisition.
v3.8.0.1
Cash and Equivalents
3 Months Ended
Mar. 31, 2018
Cash and Cash Equivalents [Abstract]  
Cash and Equivalents 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:
 
March 31, 2018
Dollars in millions
International (a)
 
Domestic (b)
 
Total
Operating cash and equivalents
$
87

 
$
77

 
$
164

Short-term investments (c)
15

 
35

 
50

Cash and equivalents held in consolidated joint ventures
270

 
2

 
272

Total
$
372

 
$
114

 
$
486


 
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 consolidated joint ventures
59

 
2

 
61

Total
$
253

 
$
186

 
$
439

 
(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.
v3.8.0.1
Accounts Receivable
3 Months Ended
Mar. 31, 2018
Receivables [Abstract]  
Accounts Receivable Accounts Receivable
    
The components of our accounts receivable, net of allowance for doubtful accounts balance, are as follows:
 
March 31, 2018
Dollars in millions
Unbilled
 
Trade & Other
 
Total
Government Services
$
194

 
$
321

 
$
515

Technology

 
34

 
34

Hydrocarbons Services
69

 
188

 
257

Subtotal
263

 
543

 
806

Non-strategic Business
4

 

 
4

Total
$
267

 
$
543

 
$
810


As a result of the adoption of ASC 606 on January 1, 2018, unbilled accounts receivable is classified in "Accounts receivable" in our condensed consolidated balance sheets as it represents the amounts that have been recorded in revenue based on contracted prices for which we have obtained an unconditional right to payment under the terms of our contracts. Retainage is now recorded in "Contract Assets" in our condensed consolidated balance sheets when the right to payment of the retainage is conditional under the terms of our contracts. Prior to the adoption of ASC 606, unbilled accounts receivables were classified as "Costs and estimated earnings in excess of billings on uncompleted contracts" and retainage was classified within "Accounts receivable".

 
December 31, 2017
Dollars in millions
Retainage
 
Trade & Other
 
Total
Government Services
$
6

 
$
189

 
$
195

Technology

 
72

 
72

Hydrocarbons Services
53

 
186

 
239

Subtotal
59

 
447

 
506

Non-strategic Business
4

 

 
4

Total
$
63

 
$
447

 
$
510

v3.8.0.1
Contract assets and contract liabilities
3 Months Ended
Mar. 31, 2018
Contractors [Abstract]  
Contract assets and contract liabilities Contract assets and contract liabilities

The timing of revenue recognition, billings and cash collections results in accounts receivable, contract assets, and contract liabilities on the condensed consolidated balance sheets.
Our contract assets by business segment are as follows:
 
March 31,
 
December 31,
 
 
 
 
Dollars in millions
2018
 
2017
 
$ Change
 
% Change
Government Services
$
138

 
$
274

 
$
(136
)
 
(50
)%
Technology
42

 
39

 
3

 
8
 %
Hydrocarbons Services
55

 
70

 
(15
)
 
(21
)%
Subtotal
235

 
383

 
(148
)
 
(39
)%
Non-strategic Business

 

 

 
N/A

Total
$
235

 
$
383

 
$
(148
)
 
(39
)%

The decrease in contract assets was primarily caused by the initial adjustment due to the adoption of ASC 606, offset by normal business operations.
Our contract liabilities by business segment are as follows:
 
March 31,
 
December 31,
 
 
 
 
Dollars in millions
2018
 
2017
 
$ Change
 
% Change
Government Services
$
250

 
$
85

 
165

 
194
 %
Technology
89

 
62

 
27

 
44
 %
Hydrocarbons Services
155

 
213

 
(58
)
 
(27
)%
Subtotal
494

 
360

 
134

 
37
 %
Non-strategic Business
8

 
8

 

 
 %
Total
$
502

 
$
368

 
134

 
36
 %

The decrease in contract liabilities was primarily related to normal business operations.
    
Revenue recognized for the three months ended March 31, 2018, that was included in the contract liability balance at December 31, 2017 was $143 million.
v3.8.0.1
Unapproved Change Orders, Claims and Estimated Recoveries of Claims Against Suppliers and Subcontractors
3 Months Ended
Mar. 31, 2018
Contractors [Abstract]  
Unapproved Change Orders, Claims and Estimated Recoveries of Claims Against Suppliers and Subcontractors 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
2018
 
2017
Amounts included in project estimates-at-completion at January 1,
$
924

 
$
294

Increase (decrease)
(17
)
 
258

Approved change orders

 
(2
)
Amounts included in project estimates-at-completion at March 31,
$
907

 
$
550

Amounts recognized over time based on progress at March 31,
$
843

 
$
454



As of March 31, 2018, 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 JKC, which has contracted to perform the engineering, procurement, supply, construction and commissioning of onshore LNG facilities for a client in Darwin, Australia (the "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 decreased by $17 million for the three months ended March 31, 2018 and increased by $256 million for the three months ended March 31, 2017, respectively.
Further, there are additional claims we believe that we or our joint ventures are entitled to recover from clients which have been excluded from estimated revenues and profit at completion as appropriate under U.S. GAAP.
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 JKC are discussed further in Note 18 to our condensed consolidated financial statements.
Liquidated damages

Some of our hydrocarbons services 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. Any accrued liquidated damages are recognized as a reduction in revenues in our condensed consolidated statements of operations.

In addition to the accrued liquidated damages, it is possible that liquidated damages that have not been included in our estimates at completion in determining project income related to several projects totaling $9 million and $9 million at March 31,
2018 and December 31, 2017, respectively, could be incurred if the projects are completed as currently forecasted. However, based upon our evaluation of our performance and other mitigating factors, we have concluded these liquidated damages are not probable.
v3.8.0.1
Claims and Accounts Receivable
3 Months Ended
Mar. 31, 2018
Receivables [Abstract]  
Claims and Accounts Receivable Claims and Accounts Receivable

Our claims and accounts receivable balance not expected to be collected within the next 12 months was $106 million and $101 million as of March 31, 2018 and December 31, 2017, 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 cost reimbursable 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 as of March 31, 2018 and December 31, 2017, related to Form 1s issued by the U.S. government questioning or objecting to costs billed to them. See Note 16 of our condensed consolidated financial statements for additional discussions. The amount also includes $27 million and $22 million as of March 31, 2018 and December 31, 2017, respectively, related to contracts where our reimbursable 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 resolution occurs.
v3.8.0.1
Restructuring
3 Months Ended
Mar. 31, 2018
Restructuring and Related Activities [Abstract]  
Restructuring Restructuring

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 employees affected by these reductions are eligible for separation benefits upon their expected termination dates which have occurred or are expected to occur through 2017. 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 condensed consolidated balance sheets.
Dollars in millions
Severance Accrual
Balance at December 31, 2017
$
1

Payments
(1
)
Balance at March 31, 2018
$

 
 
Balance at December 31, 2016
$
8

Payments
(4
)
Balance at March 31, 2017
$
4

v3.8.0.1
Equity Method Investments And Variable Interest Entities
3 Months Ended
Mar. 31, 2018
Equity Method Investments and Joint Ventures [Abstract]  
Equity Method Investments And Variable Interest Entities Equity Method Investments and Variable Interest Entities

We conduct some of our operations through joint ventures, which operate through partnership, corporation, undivided interest 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:
 
March 31,
 
December 31,
Dollars in millions
2018
 
2017
Beginning balance
$
387

 
$
369

Cumulative effect of change in accounting policy (a)
87

 

Adjusted balance at January 1, 2018
474

 
369

Equity in earnings of unconsolidated affiliates
23

 
72

Distribution of earnings of unconsolidated affiliates (b)
(1
)
 
(62
)
Advances (receipts)
(1
)
 
(11
)
Investments (c)
72

 

Foreign currency translation adjustments
(1
)
 
12

Other

 
5

Balance before reclassification
$
566

 
$
385

Reclassification of excess distributions (b)

 
11

Recognition of excess distributions (b)

 
(9
)
Ending balance
$
566

 
$
387


 
(a)
As further discussed in Note 1 to our condensed consolidated financial statements, deferred construction income in the amount of $87 million previously recorded in "Equity in and advance to unconsolidated affiliates" was reversed and included in the cumulative effect adjustment as a result of the early adoption of ASC 606 by the Aspire Defence project joint ventures.
(b)
Since 2014, we have received cash dividends in excess of the carrying value of one of our unconsolidated joint ventures. We have no obligation to return any portion of the cash dividends received. We record excess dividends as "Deferred income from unconsolidated affiliates" on our condensed consolidated balance sheets and recognize these dividends as earnings are generated by the investment. As further discussed in Note 1 to our condensed consolidated financial statements, the adoption of ASC Topic 606 by this unconsolidated joint venture resulted in the reversal of the "Deferred income from unconsolidated affiliates" balance of $101 million in our condensed consolidated balance sheets as of December 31, 2017 in the cumulative effect adjustment of the change in accounting policy.
(c)
In 2018, investments included a $72 million investment to fund JKC.

Unconsolidated Variable Interest Entities

For the VIEs in which we participate, our maximum exposure to loss consists of our equity investment in the VIE and any amounts owed to us for services we may have provided to the VIE, reduced by any unearned revenues on the project. Our maximum exposure to loss may also include our obligation to fund our proportionate share of any future losses incurred. As of March 31, 2018, we do not project any losses related to these joint venture projects. 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. In addition:

The Affinity, Aspire Defence and U.K. Road joint venture projects are further exposed to the risks of construction and insurance losses, if any, on a joint and several basis. Any losses may be limited to the extent that these joint ventures become insolvent as the joint venture customer does not have recourse against the joint venture partners.

The Ichthys LNG joint venture project is further exposed to certain losses to the extent our joint venture partners are unable to meet their obligations, as we have joint and several liability to the customer. The Ichthys JV 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 the first quarter of 2018, we made an additional investment in the joint venture of approximately
$72 million to fund our proportionate share of the ongoing project execution activities. We anticipate making additional investments in the joint venture of approximately $230 million to $330 million throughout the remainder of 2018. In April 2018 we entered into a Term Loan A to provide funding for these investments. See Note 14 to our condensed consolidated financial statements for further discussion related to the Term Loan A. See Notes 9 and 18 to our condensed consolidated financial statements for further discussion regarding contingencies related to the Ichthys JV.

The following summarizes the total assets and total liabilities as reflected in our condensed consolidated balance sheets related to our unconsolidated VIEs in which we have a significant variable interest but are not the primary beneficiary. The Aspire Defence joint venture amounts for 2017 reflect all joint ventures related to the Aspire Defence project.

 
March 31, 2018
Dollars in millions
Total assets
 
Total liabilities
Affinity joint venture (U.K. MFTS project)
$
30

 
$
14

Aspire Defence Limited
$
84

 
$
6

JKC joint venture (Ichthys LNG project)
$
198

 
$
35

U.K. Road project joint ventures
$
38

 
$
11

Middle East Petroleum Corporation (EBIC Ammonia project)
$
40

 
$
1

 
 
December 31, 2017
Dollars in millions
Total assets
 
Total liabilities
Affinity joint venture (U.K. MFTS project)
$
26

 
$
10

Aspire Defence joint ventures (Aspire Defence project)
$
10

 
$
125

JKC joint venture (Ichthys LNG project)
$
145

 
$
25

U.K. Road project joint ventures
$
36

 
$
10

Middle East Petroleum Corporation (EBIC Ammonia project)
$
38

 
$
1



Related Party Transactions

We often provide engineering, construction management and other subcontractor services to our joint ventures and our revenues include amounts related to these services. For the three months ended March 31, 2018 and 2017, our revenues included $57 million and $27 million, respectively, related to the services we provided to our joint ventures, primarily the Ichthys JV within our HS business segment. Under the terms of an alliance agreement with our EPIC joint venture, EPIC provides certain pipe fabrication services to KBR. For the three months ended March 31, 2018 and 2017, EPIC provided $0 million and $2 million, respectively, of services to KBR under the agreement.

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 three months ended March 31, 2018 and 2017, we incurred approximately $1 million and $2 million, respectively, of reimbursable costs under the TSA.

Amounts included in our condensed consolidated balance sheets related to services we provided to our unconsolidated joint ventures as of March 31, 2018 and December 31, 2017 are as follows:
 
March 31,
 
December 31,
Dollars in millions
2018
 
2017
Accounts receivable, net of allowance for doubtful accounts (a)
$
26

 
$
28

Contract assets (b)
$
2

 
$
2

Contract liabilities (b)
$
39

 
$
27

 
(a)
Includes a $7 million and $4 million net receivable from the Brown & Root Industrial Services joint venture at March 31, 2018 and December 31, 2017, respectively.
(b)
Reflects contract assets and contract liabilities primarily related to joint ventures within our HS business segment as discussed above.

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. In late 2016 Aspire Defence Limited was awarded a significant contract variation, expanding services to be provided under the existing contract including new construction, program management services and facilities maintenance across the garrisons. Aspire Defence Limited 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 Limited, the project company that is the holder of the 35-year concession contract. In addition, we have a 50% interest in the joint ventures that provide the construction and the related support services under subcontract arrangements with Aspire Defence Limited. 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.

On January 15, 2018, Carillion plc, our U.K. partner in the joint ventures that provide the construction and related support services to Aspire Defence Limited, entered into compulsory liquidation. 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. 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.

    During the first quarter of 2018, we evaluated our rights and obligations under the joint venture agreements and other commercial arrangements of the project company and its lenders. We concluded Carillion's liquidation was a reconsideration event for KBR to reevaluate the primary beneficiary of the subcontracting joint ventures in which we are partners. We concluded KBR is the primary beneficiary as it has the power to direct activities having the most significant impact on the economic performance of the subcontracting joint ventures. Consequently, KBR consolidated these entities in its financial statements effective January 15, 2018.

Prior to obtaining control of these entities, we accounted for our 50% investment in each of the subcontracting joint ventures under the equity method of accounting. The balance of our net equity investments in these entities was approximately $5 million as of January 15, 2018. As a result of obtaining control of the subcontracting joint ventures, we accounted for this transaction under the acquisition method of accounting for business combination in accordance with ASC 805. Consequently, we remeasured our equity interests in each of the subcontracting joint ventures to fair value which resulted in a gain of approximately $115 million recognized in the first quarter of 2018 and included in "Gain on consolidation of Aspire entities" in our condensed consolidated statements of operations. The fair value of each of the subcontracting joint ventures was determined using a discounted cash flow model with future cash flows based on internal forecasts of revenue and expenses over the remaining life of the subcontract agreement. To arrive at our future cash flows, we used estimates of economic and market assumptions, including growth rates in revenues, costs, estimates of future expected changes in operating margins, tax rates and cash expenditures. The estimated cash flows were discounted using a weighted-average cost of capital that reflected current market conditions and risk profile for each of the subcontracting joint ventures. We recorded $40 million of goodwill and $243 million of intangible assets related to the value of the contracts, $43 million of net liabilities, and $120 million of noncontrolling interests. The net liabilities acquired primarily consisted of cash of $205 million, accounts receivable of $12 million, accounts payable of $71 million, contract liabilities of $154 million and a deferred tax liability of $40 million. The contract intangible assets are being amortized over the remaining contract term of 23 years. Certain data necessary to complete the purchase price allocation is not yet available and primarily relates to final tax returns that provide the underlying tax basis of assets and liabilities.

On April 18, 2018, we completed the acquisition of Carillion's interests in the subcontracting entities for $50 million pursuant to a share and business purchase agreement and approval by Aspire Defence Limited, the Aspire Defence Limited project lenders and the MoD. We incurred $1 million of acquisition-related costs for the three months ended March 31, 2018, which were recorded in "Acquisition and integration related costs" on our condensed consolidated statements of operations.

The results of operations of the subcontracting joint ventures have been included in our condensed consolidated statements of operations for periods subsequent to obtaining control on January 15, 2018. The acquired subcontracting joint ventures contributed $105 million of revenues and $13 million of gross profit for the period from January 15, 2018 through March 31, 2018. Due to the timing of determining when control of the joint ventures was obtained , we have omitted certain disclosures for supplemental pro forma financial information. We intend to provide these disclosures in future filings.

Additionally, we concluded Carillion’s liquidation was not a reconsideration event for KBR with regards to its involvement in the Aspire Defence Limited. We continue to account for our 45% in Aspire Defence Limited joint venture under the equity method of accounting.

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
March 31, 2018
Total assets
 
Total liabilities
KJV-G joint venture (Gorgon LNG project)
$
16

 
$
48

JKS joint venture (Escravos Gas-to-Liquids project)
$
8

 
$
13

Fasttrax Limited (Fasttrax project)
$
62

 
$
50

Aspire Defence Works/Services joint ventures (Aspire Defence project)
$
313

 
$
292

 

Dollars in millions
December 31, 2017
Total assets
 
Total liabilities
KJV-G joint venture (Gorgon LNG project)
$
15

 
$
48

JKS joint venture (Escravos Gas-to-Liquids project)
$
8

 
$
13

Fasttrax Limited (Fasttrax project)
$
57

 
$
47

v3.8.0.1
Pension Plans
3 Months Ended
Mar. 31, 2018
Retirement Benefits [Abstract]  
Pension Plans Pension Plans

The components of net periodic benefit cost related to pension benefits for the three months ended March 31, 2018 and 2017 were as follows:
 
Three Months Ended March 31,
 
2018
 
2017
Dollars in millions
United States
 
Int’l
 
United States
 
Int’l
Components of net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$

 
$

 
$

 
$

Interest cost
1

 
13

 
1

 
13

Expected return on plan assets
(1
)
 
(21
)
 
(1
)
 
(18
)
Settlements/Curtailments

 

 

 

Recognized actuarial loss

 
7

 

 
8

Net periodic benefit cost
$

 
$
(1
)
 
$

 
$
3


For the three months ended March 31, 2018, we have contributed approximately $10 million of the $40 million we expect to contribute to our plans in 2018.
v3.8.0.1
Debt And Other Credit Facilities
3 Months Ended
Mar. 31, 2018
Debt Disclosure [Abstract]  
Debt and Other Credit Facilities Debt and Other Credit Facilities

Credit Agreement

We have 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 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 March 31, 2018, there were $38 million in letters of credit outstanding and $540 million of borrowings outstanding under the Credit Agreement.

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 3.25 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. As of March 31, 2018, 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 (as defined in the Credit Agreement) of $1.1 billion. As of March 31, 2018, the remaining availability under the Distribution Cap was approximately $946 million.

Subsequent Event

On April 25, 2018, the Company refinanced its $1 billion Credit Agreement due September 2020. The new senior secured credit facility ("Senior Credit Facility") consist of a $500 million revolving credit facility ("Revolver"), a $500 million performance letter of credit facility ("PLOC"), a $350 million Delayed Draw Term Loan A, ("Term Loan A") and an $800 million Term Loan B ("Term Loan B"). The Revolver, PLOC and Term Loan A mature in April 2023 and the Term Loan B matures in April 2025. The Term Loan A may be drawn upon until the earlier of becoming fully drawn or June 30, 2019 (the "Availability Period"). Borrowings under the Term Loan A may only be used to fund investments in JKC. See Note 12 to our condensed consolidated financial statements for a discussion on JKC.

The interest rate with respect to the New Term Loan B is LIBOR plus 3.75%.The interest rates with respect to the Revolver and Term Loan A are based on, at the Company's option, adjusted LIBOR plus an additional margin or base rate plus additional margin. Letters of credit issued under the PLOC bear interest at varying rates. Additionally, there is a commitment fee with respect to the Revolver. The details of the applicable margins and commitment fees are based on the Company's consolidated leverage ratio as follows:
 
 
Revolver and Term Loan A
 
 
 
 
Consolidated Leverage Ratio
 
LIBOR Margin
 
Base Rate Margin
 
Performance Letter of Credit Fee
 
Commitment Fee
Greater than or equal to 4.00 to 1.00
 
3.25
%
 
2.25
%
 
1.95
%
 
0.450
%
Less than 4.00 to 1.00 but greater than or equal to 3.00 to 1.00
 
3.00
%
 
2.00
%
 
1.80
%
 
0.400
%
Less than 3.00 to 1.00 but greater than or equal to 2.00 to 1.00
 
2.75
%
 
1.75
%
 
1.65
%
 
0.375
%
Less than 2.00 to 1.00
 
2.50
%
 
1.50
%
 
1.50
%
 
0.350
%


The Term Loan A provides for quarterly principal payments of 2.50% of the aggregate principal amount commencing in the first quarter after the Availability Period (on the last business day of each quarter). The Term Loan B provides for quarterly principal payments of 0.25% of the initial aggregate principal amounts (on the last business day of each quarter).

The Senior Credit Facility contains customary restrictive covenants, subject to certain permitted amounts and exceptions, including covenants limiting our ability to incur additional liens and indebtedness, enter into asset sales, repurchase our equity shares and make certain types of investments.

The Revolver, PLOC, and Term Loan A contain financial maintenance covenants of a maximum consolidated leverage ratio and a consolidated interest coverage ratio (as such terms are defined in the Senior Credit Facility). Our consolidated leverage ratio as of the last day of any fiscal quarter, commencing with the fiscal quarter ending June 30, 2018, may not exceed 4.50 to 1 and reducing gradually during 2019 and 2020 to 3.50 to 1. Our consolidated interest coverage ratio as of the last day of any fiscal quarter, commencing with the fiscal quarter ending June 30, 2018 and thereafter, may not be less than 3.00 to 1.

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. Under the terms of the arrangement, Fasttrax Limited operates and maintains 91 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 we and the other joint venture partners funded the joint venture with equity and subordinated notes 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 commenced in March 2005 and 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.  Semi-annual payments on the subordinated notes commenced in March 2006. For financial reporting purposes, the portion of the subordinated notes payable to us is eliminated in consolidation and consequently, only our partner's portion of the subordinated notes appears in the condensed consolidated financial statements.
v3.8.0.1
Inc