KBR, INC., 10-Q filed on 10/30/2018
Quarterly Report
v3.10.0.1
Document And Entity Information - shares
9 Months Ended
Sep. 30, 2018
Oct. 12, 2018
Document and Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Sep. 30, 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   140,877,868
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q3  
v3.10.0.1
Condensed Consolidated Statements of Operations - USD ($)
shares in Millions, $ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Income Statement [Abstract]        
Revenues $ 1,278 $ 1,034 $ 3,583 $ 3,234
Cost of revenues (1,156) (947) (3,250) (2,957)
Gross profit 122 87 333 277
Equity in earnings of unconsolidated affiliates 21 23 54 64
General and administrative expenses (37) (37) (113) (107)
Acquisition and integration related costs (1) 0 (5) 0
Gain on disposition of assets 0 0 0 5
Gain on consolidation of Aspire entities (2) 0 113 0
Operating income 103 73 382 239
Interest expense (20) (6) (43) (16)
Other non-operating loss (1) (4) (4) (9)
Income before income taxes and noncontrolling interests 82 63 335 214
Provision for income taxes (22) (16) (74) (50)
Net income 60 47 261 164
Net income attributable to noncontrolling interests (2) (2) (23) (5)
Net income attributable to KBR $ 58 $ 45 $ 238 $ 159
Net income attributable to KBR per share:        
Basic (usd per share) $ 0.41 $ 0.32 $ 1.68 $ 1.12
Diluted (usd per share) $ 0.41 $ 0.32 $ 1.68 $ 1.12
Basic weighted average common shares outstanding (shares) 141 140 140 141
Diluted weighted average common shares outstanding (shares) 141 140 141 141
Cash dividends declared per share (usd per share) $ 0.08 $ 0.08 $ 0.24 $ 0.24
v3.10.0.1
Condensed Consolidated Statements of Comprehensive Income (Loss) - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Statement of Comprehensive Income [Abstract]        
Net income $ 60 $ 47 $ 261 $ 164
Foreign currency translation adjustments:        
Foreign currency translation adjustments, net of tax (9) 2 (37) 7
Reclassification adjustment included in net income 0 0 5 0
Foreign currency translation adjustments, net of taxes of $0, $1, $(3) and $7 (9) 2 (32) 7
Pension and post-retirement benefits, net of tax:        
Actuarial losses, net of tax 0 0 0 0
Reclassification adjustment included in net income 5 5 18 18
Pension and post-retirement benefits, net of taxes of $(1), $(2), $(3) and $(4) 5 5 18 18
Changes in fair value of derivatives:        
Changes in fair value of derivatives, net of tax (4) 1 (8) 1
Reclassification adjustment included in net income 3 (1) 3 (1)
Changes in fair value of derivatives, net of taxes of $0, $0, $0 and $0 (1) 0 (5) 0
Other comprehensive (loss) income, net of tax (5) 7 (19) 25
Comprehensive income 55 54 242 189
Less: Comprehensive income attributable to noncontrolling interests (2) (3) (23) (4)
Comprehensive income attributable to KBR $ 53 $ 51 $ 219 $ 185
v3.10.0.1
Condensed Consolidated Statements of Comprehensive Income (Loss) (Parenthetical) - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Statement of Comprehensive Income [Abstract]        
Foreign currency translation, tax $ 0 $ 1 $ (3) $ 7
Pension and post-retirement benefits, tax (1) (2) (3) (4)
Changes in fair value of derivatives, tax $ 0 $ 0 $ 0 $ 0
v3.10.0.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Millions
Sep. 30, 2018
Dec. 31, 2017
Current assets:    
Cash and equivalents $ 581 $ 439
Accounts receivable, net of allowance for doubtful accounts of $12 and $12 866 510
Contract assets 214 383
Other current assets 103 93
Total current assets 1,764 1,425
Claims and accounts receivable 96 101
Property, plant, and equipment, net of accumulated depreciation of $360 and $329 (including net PPE of $37 and $34 owned by a variable interest entity) 129 130
Goodwill 1,268 968
Intangible assets, net of accumulated amortization of $145 and $122 523 239
Equity in and advances to unconsolidated affiliates 724 387
Deferred income taxes 211 300
Other assets 148 124
Total assets 4,863 3,674
Current liabilities:    
Accounts payable 492 350
Contract liabilities 464 368
Accrued salaries, wages and benefits 229 186
Nonrecourse project debt 10 10
Other current liabilities 169 157
Total current liabilities 1,364 1,071
Pension obligations 328 391
Employee compensation and benefits 106 118
Income tax payable 84 85
Deferred income taxes 12 18
Nonrecourse project debt 22 28
Revolving credit agreement 115 470
Long-term debt 1,010 0
Deferred income from unconsolidated affiliates 0 101
Other liabilities 164 171
Total liabilities 3,205 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, 177,354,248 and 176,638,882 shares issued, and 140,874,917 and 140,166,589 shares outstanding 0 0
Paid-in capital in excess of par (PIC) 2,175 2,091
Accumulated other comprehensive loss (940) (921)
Retained earnings 1,225 877
Treasury stock, 36,479,331 shares and 36,472,293 shares, at cost (817) (818)
Total KBR shareholders’ equity 1,643 1,229
Noncontrolling interests 15 (8)
Total shareholders’ equity 1,658 1,221
Total liabilities and shareholders’ equity $ 4,863 $ 3,674
v3.10.0.1
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Millions
Sep. 30, 2018
Dec. 31, 2017
Receivables:    
Allowance for doubtful accounts $ 12 $ 12
Property, plant, and equipment:    
Accumulated depreciation 360 329
PP&E owned by a VIE, net 37 34
Intangibles:    
Accumulated amortization $ 145 $ 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) 177,354,248 176,638,882
Common stock, shares outstanding (shares) 140,874,917 140,166,589
Treasury stock, shares (shares) 36,479,331 36,472,293
v3.10.0.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Millions
9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Cash flows from operating activities:    
Net income $ 261 $ 164
Adjustments to reconcile net income to net cash provided by (used in) operating activities:    
Depreciation and amortization 47 38
Equity in earnings of unconsolidated affiliates (54) (64)
Deferred income tax expense (benefit) 29 (75)
Gain on consolidation of Aspire entities (113) 0
Other 13 20
Changes in operating assets and liabilities:    
Accounts receivable, net of allowance for doubtful accounts (144) 100
Contract assets (4) 11
Claims receivable 0 400
Accounts payable 72 (144)
Contract liabilities (63) (207)
Accrued salaries, wages and benefits 18 39
Reserve for loss on uncompleted contracts (8) (43)
Payments from unconsolidated affiliates, net 7 6
Distributions of earnings from unconsolidated affiliates 16 41
Income taxes payable 28 (7)
Pension funding (30) (28)
Net settlement of derivative contracts (2) 4
Other assets and liabilities (37) (17)
Total cash flows provided by operating activities 36 238
Cash flows from investing activities:    
Purchases of property, plant and equipment (15) (6)
Proceeds from sale of assets or investments 1 2
Investments in equity method joint ventures (257) 0
Acquisition of businesses, net of cash acquired (354) 2
Adjustments to cash due to consolidation of Aspire entities 197 0
Other 0 (2)
Total cash flows used in investing activities (428) (4)
Cash flows from financing activities:    
Payments to reacquire common stock (3) (52)
Acquisition of remaining ownership interest in joint ventures (56) 0
Distributions to noncontrolling interests 0 (1)
Payments of dividends to shareholders (34) (34)
Net proceeds from issuance of common stock 2 0
Borrowings on revolving credit agreements 250 0
Borrowings on long-term debt 1,052 0
Payments on revolving credit agreements (605) (180)
Payments on short-term and long-term borrowings (7) (5)
Debt issuance costs (47) 0
Total cash flows provided by (used in) financing activities 552 (272)
Effect of exchange rate changes on cash (18) 13
Increase (decrease) in cash and equivalents 142 (25)
Cash and equivalents at beginning of period 439 536
Cash and equivalents at end of period 581 511
Supplemental disclosure of cash flows information:    
Cash paid for interest 34 16
Cash paid for income taxes (net of refunds) 20 128
Noncash financing activities    
Dividends declared $ 11 $ 11
v3.10.0.1
Description of Company And Significant Accounting Policies
9 Months Ended
Sep. 30, 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 11 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

Effective January 1, 2018, we changed 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.

Also 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

We classify revenue contract liabilities as current or noncurrent based on the timing of when we expect to recognize revenue. The noncurrent portion of contract liabilities is included in "Other liabilities" in our condensed consolidated balance sheets. 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 that 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 September 30, 2018 was as follows:
 
Three Months Ended September 30, 2018
 
As
 
Balances Without
 
Effect of Change
Dollars in millions
Reported
 
Adoption of ASC 606
 
Higher/(Lower)
Statement of Operations
 
 
 
 
 
Revenues
$
1,278

 
$
1,294

 
$
(16
)
Cost of revenues
(1,156
)
 
(1,157
)
 
(1
)
Equity in earnings of unconsolidated affiliates
21

 
19

 
2

Income before income taxes and noncontrolling interests
82

 
92

 
(10
)
Provision for income taxes
(22
)
 
(24
)
 
(2
)
Net income
60

 
68

 
(8
)
 
 
 
 
 
 
EPS
 
 
 
 
 
Basic
$
0.41

 
$
0.47

 
$
(0.06
)
Diluted
$
0.41

 
$
0.47

 
$
(0.06
)

 
Nine Months Ended September 30, 2018
 
As
 
Balances Without
 
Effect of Change
Dollars in millions
Reported
 
Adoption of ASC 606
 
Higher/(Lower)
Statement of Operations
 
 
 
 
 
Revenues
$
3,583

 
$
3,588

 
$
(5
)
Cost of revenues
(3,250
)
 
(3,251
)
 
(1
)
Equity in earnings of unconsolidated affiliates
54

 
50

 
4

Income before income taxes and noncontrolling interests
335

 
335

 

Provision for income taxes
(74
)
 
(75
)
 
(1
)
Net income
261

 
260

 
1

 
 
 
 
 
 
EPS
 
 
 
 
 
Basic
$
1.68

 
$
1.68

 
$

Diluted
$
1.68

 
$
1.68

 
$


 
As of September 30, 2018
 
As
 
Balances Without
 
Effect of Change
Dollars in millions
Reported
 
Adoption of ASC 606
 
Higher/(Lower)
Assets
 
 
 
 
 
Accounts receivable
$
866

 
$
609

 
$
257

Contract assets
214

 
471

 
(257
)
Other current assets
103

 
102

 
1

Equity in and advances to unconsolidated affiliates
724

 
716

 
8

Deferred income taxes
211

 
218

 
(7
)
Other assets
148

 
143

 
5

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Contract liabilities
464

 
496

 
(32
)
Deferred income taxes
12

 
14

 
(2
)
Deferred income from unconsolidated affiliates

 
97

 
(97
)
Other liabilities
164

 
164

 

 
 
 
 
 
 
Equity
 
 
 
 
 
Retained earnings
1,225

 
1,080

 
145

Accumulated other comprehensive loss
(940
)
 
(933
)
 
(7
)

 
Nine Months Ended September 30, 2018
 
As
 
Balances Without
 
Effect of Change
Dollars in millions
Reported
 
Adoption of ASC 606
 
Higher/(Lower)
Cash flows from operating activities
 
 
 
 
 
Net income
$
261

 
$
260

 
$
1

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Equity in earnings of unconsolidated affiliates
(54
)
 
(50
)
 
(4
)
Deferred income tax (benefit) expense
29

 
30

 
(1
)
 
 
 
 
 
 
Changes in operating assets and liabilities, net of acquired businesses:
 
 
 
 
 
Accounts receivable, net of allowances for doubtful accounts
(144
)
 
114

 
(258
)
Contract assets
(4
)
 
(263
)
 
259

Contract liabilities
(63
)
 
(65
)
 
2

Other assets and liabilities
(37
)
 
(38
)
 
1

Total cash flows used in operating activities
36

 
36

 


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, 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 ri
ght 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 remaining unconsolidated Aspire Defence contracting entities effective January 1, 2018. As a result of the adoption by the Aspire Defence contracting entities, 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 contracting entities 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 contracting entities. Except for the Aspire Defence contract entities, we have availed the SEC exemption under ASU 2017-13 to defer the application of ASC 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 September 30, 2018 and December 31, 2017 are presented below:
 
September 30,
 
December 31,
Dollars in millions
2018
 
2017
Current maturities of long-term debt
$
21

 
$

Reserve for estimated losses on uncompleted contracts
7

 
15

Retainage payable
32

 
30

Income taxes payable
21

 
17

Restructuring reserve
5

 
9

Taxes payable not based on income
9

 
11

Value-added tax payable
30

 
13

Insurance payable
4

 
9

Dividend payable
11

 
11

Other miscellaneous liabilities
29

 
42

Total other current liabilities
$
169

 
$
157


Other Liabilities

Included in "Other liabilities" on our condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017 is noncurrent deferred rent of $94 million and $99 million, respectively. Also included in "Other liabilities" is a payable to our former parent of $5 million as of September 30, 2018 and December 31, 2017.
v3.10.0.1
Significant Accounting Policies
9 Months Ended
Sep. 30, 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 represents revisions to those accounting policies due to the adoption of ASC 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 target 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 once the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include such amounts in the transaction price are based largely on our assessment of legal enforceability, performance and any other information (historical, current, and forecasted) that is reasonably available to us.

Many of our government services contracts are for labor at agreed hourly rates on a cost reimbursable basis to the customer. These contracts are accounted for as a series of distinct services because (a) the labor is provided as a continuous service, (b) each time increment of labor provided is distinct, (c) the nature of the services provided is substantially the same, and (d) the pattern of transfer is the same. In these types of contracts, 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 bill the customer a fixed monthly fee and recognize revenue over time on a straight-line basis where our level of effort remains substantially the same from month to month or where that is not the case, using a cost-to-cost input measure of progress as services are provided. For cost reimbursable contracts, we bill the customer all direct costs incurred each month plus an agreed provisional rate for overhead and fee, which are finalized at a later date. Revenue for cost reimbursable contracts is recognized as the direct costs are incurred and billed because the base operations represent a series of distinct services and the direct costs are consistent with our level of effort each month. 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 total 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 due to the continuous transfer of control to the customer. 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 the LBED has been completed, such as a go or no-go decision on the project. Liquidated damage penalties in our technology contracts are typically triggered by late delivery and are calculated based on a weekly rate and are capped at a percentage of the total 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 once the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include such amounts in the transaction price are based largely on our assessment of legal enforceability, performance and any other 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 represents 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. Reductions in costs are recognized to the extent of the lesser of the amounts management expects to recover or to costs incurred.

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 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 contract liabilities as current or noncurrent based on the timing of when we expect to recognize revenue. The noncurrent portion of contract liabilities 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 direct, incremental 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.
v3.10.0.1
Business Segment Information
9 Months Ended
Sep. 30, 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.

The following table presents revenues, gross profit (loss), equity in earnings of unconsolidated affiliates, general and administrative expenses, acquisition and integration related costs, gain on disposition of assets, gain of consolidation of Aspire entities, 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
 
Nine Months Ended
 
September 30,
 
September 30,
Dollars in millions
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Government Services
$
928

 
$
582

 
$
2,473

 
$
1,640

Technology
81

 
60

 
215

 
196

Hydrocarbons Services
268

 
388

 
894

 
1,361

Subtotal
1,277

 
1,030

 
3,582

 
3,197

Non-strategic Business
1

 
4

 
1

 
37

Total revenues
$
1,278

 
$
1,034

 
$
3,583

 
$
3,234

Gross profit (loss):
 
 
 
 
 
 
 
Government Services
$
81

 
$
39

 
$
204

 
$
113

Technology
23

 
19

 
61

 
50

Hydrocarbons Services
23

 
26

 
75

 
114

Subtotal
127

 
84

 
340

 
277

Non-strategic Business
(5
)
 
3

 
(7
)
 

Total gross profit
$
122

 
$
87

 
$
333

 
$
277

Equity in earnings of unconsolidated affiliates:
 
 
 
 
 
 
 
Government Services
$
8

 
$
14

 
$
22

 
$
41

Hydrocarbons Services
13

 
9

 
32

 
23

Subtotal
21

 
23

 
54

 
64

Non-strategic Business

 

 

 

Total equity in earnings of unconsolidated affiliates
$
21

 
$
23

 
$
54

 
$
64

General and administrative expenses:
 
 
 
 
 
 
 
Government Services
$
(12
)
 
$
(6
)
 
$
(30
)
 
$
(18
)
Technology
(1
)
 

 
(2
)
 
(2
)
Hydrocarbons Services
(6
)
 
(8
)
 
(21
)
 
(21
)
Other
(18
)
 
(23
)
 
(60
)
 
(66
)
Subtotal
(37
)
 
(37
)
 
(113
)
 
(107
)
Non-strategic Business

 

 

 

Total general and administrative expenses
$
(37
)
 
$
(37
)
 
$
(113
)
 
$
(107
)
Acquisition and integration related costs:
 
 
 
 
 
 
 
Government Services
$
(1
)
 
$

 
$
(5
)
 
$

Technology

 

 

 

Hydrocarbons Services

 

 

 

Other

 

 

 

Subtotal
(1
)
 

 
(5
)
 

Non-strategic Business

 

 

 

Total acquisition and integration related costs
$
(1
)
 
$

 
$
(5
)
 
$

Gain on disposition of assets:
 
 
 
 
 
 
 
Government Services
$

 
$

 
$

 
$

Technology

 

 

 

Hydrocarbons Services

 

 

 
5

Other

 

 

 

Subtotal

 

 

 
5

Non-strategic Business

 

 

 

Total gain on disposition of assets
$

 
$

 
$

 
$
5

Gain on consolidation of Aspire entities:
 
 
 
 
 
 
 
Government Services
$
(2
)
 
$

 
$
118

 
$

Technology

 

 

 

Hydrocarbons Services

 

 

 

Other

 

 
(5
)
 

Subtotal
(2
)
 

 
113

 

Non-strategic Business

 

 

 

Total gain on consolidation of Aspire entities
$
(2
)
 
$

 
$
113

 
$

Segment operating income (loss):
 
 
 
 
 
 
 
Government Services
$
73

 
$
48

 
$
309

 
$
136

Technology
23

 
18

 
59

 
47

Hydrocarbons Services
29

 
26

 
86

 
121

Other
(17
)
 
(22
)
 
(65
)
 
(65
)
Subtotal
108

 
70

 
389

 
239

Non-strategic Business
(5
)
 
3

 
(7
)
 

Total segment operating income (loss)
$
103

 
$
73

 
$
382

 
$
239


 

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 that significantly impacted operating income were as follows:

Hydrocarbons Services

We recognized changes to equity in earnings as a result of various changes to estimates on the Ichthys LNG project during the three and nine months ended September 30, 2017. See Note 10 for a discussion of the matters impacting this project during the three and nine months ended September 30, 2018.

In the second quarter of 2018, we recognized a favorable change in estimated revenues and net income associated with variable consideration recognized as a result of successful completion and performance testing of a major Hydrocarbons Services project.

The PEMEX and PEP arbitration settlement (see Note 16 to our condensed consolidated financial statements) resulted in additional revenues and gross profit of $35 million during the nine months ended September 30, 2017.
v3.10.0.1
Revenue
9 Months Ended
Sep. 30, 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
Nine Months Ended
 
September 30,
September 30,
Dollars in millions
2018
 
2018
By Service / Product Types
 
 
 
     Government Services
 
 
 
          Science and Space
$
206

 
$
453

          Engineering
292

 
846

          Logistics
430

 
1,174

     Total Government Services
928

 
2,473

 
 
 
 
     Hydrocarbons
 
 
 
          Technology
81

 
215

 
 
 
 
          Hydrocarbons Services
 
 
 
               Onshore
217

 
721

               Offshore
21

 
70

               Industrial Services
14

 
55

               Consulting
16

 
48

          Total Hydrocarbons Services
268

 
894

 
 
 
 
     Total Hydrocarbons
349

 
1,109

 
 
 
 
     Non-strategic business
1

 
1

 
 
 
 
Total net revenue
$
1,278

 
$
3,583



Government Services revenue earned from key U.S. government customers including U.S. DoD agencies and NASA was $717 million and $1.8 billion for the three and nine months ended September 30, 2018, respectively. Government Services revenue earned from non-U.S. government customers including the U.K. MoD, the Australian Defence Force and others was $211 million and $627 million for the three and nine months ended September 30, 2018, respectively.
  
Revenue by geographic destination was as follows:
 
Three Months Ended September 30, 2018
 
 
 
Hydrocarbons
 
 
 
 
Total by Countries/Regions
Dollars in millions
Government Services
 
Technology
 
Hydrocarbons Services
 
Non-strategic Business
 
Total
     United States
$
484

 
$
2

 
$
113

 
$
1

 
$
600

     Middle East
200

 
1

 
36

 

 
237

     Europe
197

 
13

 
39

 

 
249

     Australia
16

 

 
54

 

 
70

     Canada

 

 
2

 

 
2

     Africa
20

 
8

 
10

 

 
38

     Asia

 
54

 
5

 

 
59

     Other countries
11

 
3

 
9

 

 
23

Total net revenue
$
928

 
$
81

 
$
268

 
$
1

 
$
1,278


 
Nine Months Ended September 30, 2018
 
 
 
Hydrocarbons
 
 
 
 
Total by Countries/Regions
Dollars in millions
Government Services
 
Technology
 
Hydrocarbons Services
 
Non-strategic Business
 
Total
     United States
$
1,229

 
$
12

 
$
364

 
$
1

 
$
1,606

     Middle East
548

 
12

 
97

 

 
657

     Europe
561

 
34

 
137

 

 
732

     Australia
44

 
1

 
221

 

 
266

     Canada

 
2

 
17

 

 
19

     Africa
58

 
20

 
16

 

 
94

     Asia

 
129

 
11

 

 
140

     Other countries
33

 
5

 
31

 

 
69

Total net revenue
$
2,473

 
$
215

 
$
894

 
$
1

 
$
3,583



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 September 30, 2018
 
 
 
Hydrocarbons
 
 
 
 
Dollars in millions
Government Services
 
Technology
 
Hydrocarbons Services
 
Non-strategic Business
 
Total
     Fixed Price
$
268

 
$
80

 
$
38

 
$
1

 
$
387

     Cost Reimbursable
660

 
1

 
230

 

 
891

Total net revenue
$
928

 
$
81

 
$
268

 
$
1

 
$
1,278


 
Nine Months Ended September 30, 2018
 
 
 
Hydrocarbons
 
 
 
 
Dollars in millions
Government Services
 
Technology
 
Hydrocarbons Services
 
Non-strategic Business
 
Total
     Fixed Price
$
769

 
$
207

 
$
142

 
$
1

 
$
1,119

     Cost Reimbursable
1,704

 
8

 
752

 

 
2,464

Total net revenue
$
2,473

 
$
215

 
$
894

 
$
1

 
$
3,583



We recognized revenue of $23 million and $54 million from performance obligations satisfied in previous periods for the three and nine month periods ended September 30, 2018, respectively.

On September 30, 2018, we had $10.1 billion of transaction price allocated to remaining performance obligations. We expect to recognize approximately 30% of our remaining performance obligations as revenue within one year, 24% in years two through five, and 46% 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 September 30, 2018.
v3.10.0.1
Acquisitions, Dispositions and Other Transactions
9 Months Ended
Sep. 30, 2018
Business Combinations [Abstract]  
Acquisitions, Dispositions and Other Transactions Acquisitions, Dispositions and Other Transactions

Stinger Ghaffarian Technologies Acquisition

On April 25, 2018, we acquired 100% of the outstanding stock of Stinger Ghaffarian Technologies ("SGT"). SGT is a leading provider of high-value engineering, mission operations, scientific and IT software solutions in the government services market. We accounted for this transaction using the acquisition method under ASC 805, Business Combinations. The acquisition is reported within our GS business segment. Aggregate base consideration for the acquisition was $355 million, plus $13 million of working capital and other purchase price adjustments set forth in the purchase agreement. We initially recognized goodwill of $257 million arising from the acquisition, which primarily relates to future growth opportunities based on an expanded service offering and other expected synergies from the combined operations. Approximately $237 million of the goodwill is deductible for tax purposes. The intangible assets recognized were comprised of customer relationships and backlog. These intangibles will be amortized over a weighted-average period of 19 years. During the third quarter of 2018, we recognized an adjustment to reflect the final working capital settlement, which increased other current assets and decreased the fair value of consideration transferred by $3 million.

We funded the acquisition with borrowings under our new Senior Credit Facility that were entered into concurrently with the acquisition. See Note 13 to our condensed consolidated financial statements for information related to our new Senior Secured Credit Facility. We recognized direct, incremental costs related to this acquisition of $1 million and $4 million during the three and nine months ended September 30, 2018, respectively, which are included in "Acquisition and integration related costs" on the condensed consolidated statements of operations.

The following table summarizes the consideration paid for this acquisition and the fair value of the assets acquired and liabilities assumed as of the acquisition date.
Dollars in millions
SGT
Fair value of total consideration transferred
$
365

Recognized amounts of identifiable assets acquired and liabilities assumed:
 
   Cash and equivalents
11

   Accounts receivable
52

   Contract assets
21

   Other current assets
2

      Total current assets
86

   Property, plant and equipment, net
2

   Equity in and advances to unconsolidated affiliates
2

   Intangible assets
74

   Deferred income taxes
6

   Other assets
8

      Total assets
178

   Accounts payable
27

   Contract liabilities
6

   Accrued salaries, wages and benefits
28

   Other current liabilities
5

      Total current liabilities
66

   Employee compensation and benefits
2

   Other liabilities
2

      Total liabilities
70

Goodwill
$
257



The acquired SGT business contributed $126 million and $216 million of revenues and $12 million and $19 million of gross profit for the three and nine month periods ended September 30, 2018, respectively, within our GS business segment.

Aspire Defence Subcontracting Joint Ventures

On January 15, 2018, Carillion plc ("Carillion"), 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 and control 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 were 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 began consolidating 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 these transactions under the acquisition method of accounting for business combinations 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 $113 million 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 agreements. 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 the risk profile for each of the subcontracting joint ventures.

We recognized goodwill of approximately $44 million, which was primarily related to the deferred tax liabilities associated with the contract-related intangible assets acquired in the transaction. None of the goodwill is deductible for tax purposes. The contract-related intangible assets have estimated useful lives ranging 4 to 23 years. During the third quarter of 2018, we made immaterial adjustments and reclassifications to the previously reported assets acquired and liabilities assumed upon obtaining control of the subcontracting joint ventures including an increase to accounts receivable of $10 million and decrease to intangible assets of approximately $9 million. Certain data necessary to complete the purchase price allocation is not yet available and primarily relates to the final tax returns that provide the underlying tax basis of the assets and liabilities. The following table summarizes the fair value of the assets acquired and liabilities assumed as of the date we obtained control of the subcontracting joint ventures.

Dollars in millions
Aspire
Fair value of Aspire Defence subcontracting entities
$
240

Recognized amounts of identifiable assets acquired and liabilities assumed:
 
   Cash and equivalents
197

   Accounts receivable
14

   Other current assets
12

      Total current assets
223

   Property, plant and equipment, net
9

   Intangible assets
244

      Total assets
476

   Accounts payable
53

   Contract liabilities
161

   Accrued salaries, wages and benefits
1

   Other current liabilities
21

      Total current liabilities
236

   Deferred income taxes
42

   Other liabilities
2

      Total liabilities
280

Goodwill
$
44

 
 
Noncontrolling interests
$
120



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 accounted for the change in KBR's interest as an equity transaction. The difference between the noncontrolling interests of $124 million in the subcontracting entities at the date of acquisition and the cash consideration paid to Carillion was recognized as a net increase to "PIC" of $74 million for the nine month period ended September 30, 2018. We incurred $0 million and $1 million of acquisition-related costs for the three and nine months ended September 30, 2018, which were recorded in "Acquisition and integration related costs" on our condensed consolidated statements of operations.

The results of operations of the subcontracting entities have been included in our condensed consolidated statements of operations for periods subsequent to assuming control on January 15, 2018. The acquired subcontracting joint ventures contributed $138 million and $387 million of revenues and $14 million and $42 million of gross profit for the three and nine month periods ended September 30, 2018, respectively, within our GS business segment.

The following supplemental pro forma condensed consolidated results of operations assume that SGT and the Aspire Defence subcontracting joint ventures had been acquired as of January 1, 2017. The supplemental pro forma information was prepared based on the historical financial information of SGT and the Aspire Defence subcontracting joint ventures and has been adjusted to give effect to pro forma adjustments that are both directly attributable to the transaction and factually supportable. Pro forma adjustments were primarily related to the amortization of intangibles, interest on borrowings related to the acquisitions, and the reclassification of the gain on consolidation of the Aspire entities to January 1, 2017. 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 acquisitions occurred on January 1, 2017, nor is it indication of future results of operations.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in millions
2018
 
2017
 
2018
 
2017
Revenue
$
1,278

 
$
1,268

 
$
3,730

 
$
3,911

Net income attributable to KBR
61

 
43