Edgar Filing: KBR, INC.

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2017



¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to

Commission File Number: 1-33146

KBR, Inc.

(Exact name of registrant as specified in its charter)



Delaware		20-4536774
(State of incorporation)		(I.R.S. Employer Identification No.)

601 Jefferson Street, Suite 3400, Houston, Texas		77002
(Address of principal executive offices)		(Zip Code)

(713) 753-3011

(Registrant's telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	ý	Accelerated filer	¨
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨
		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) if the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

As of July 12, 2017, there were 139,880,071 shares of KBR, Inc. Common Stock, par value $0.001 per share, outstanding.

TABLE OF CONTENTS




	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Information	6
Condensed Consolidated Statements of Operations	6
Condensed Consolidated Statements of Comprehensive Income	7
Condensed Consolidated Balance Sheets	8
Condensed Consolidated Statements of Cash Flows	9
Notes to Condensed Consolidated Financial Statements	10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3. Quantitative and Qualitative Disclosures About Market Risk	50
Item 4. Controls and Procedures	51
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	52
Item 1A. Risk Factors	52
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 6. Exhibits	53
SIGNATURES	54

Forward-Looking and Cautionary Statements

This Quarterly Report on Form 10-Q contains certain statements that are, or may be deemed to be, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, as amended. The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Some of the statements contained in this Quarterly Report on Form 10-Q are forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. The words "believe," "may," "estimate," "continue," "anticipate," "intend," "plan," "expect" and similar expressions are intended to identify forward-looking statements. Forward-looking statements include information concerning our possible or assumed future financial performance and results of operations.

We have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. While it is not possible to identify all factors, factors that could cause actual future results to differ materially include the risks and uncertainties disclosed in our 2016 Annual Report on Form 10-K contained in Part I under "Risk Factors" and in this Quarterly Report on Form 10-Q in Part II under "Risk Factors."

Many of these factors are beyond our ability to control or predict. Any of these factors, or a combination of these factors, could materially and adversely affect our future financial condition or results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially and adversely from those projected in the forward-looking statements. We caution against putting undue reliance on forward-looking statements or projecting any future results based on such statements or on present or prior earnings levels. In addition, each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statement.

Glossary of Terms

The following frequently used abbreviations or acronyms are used in this Quarterly Report on Form 10-Q as defined below:



Abbreviation/Acronym		Definition
Affinity		Affinity Flying Training Services Ltd.
AOCL		Accumulated other comprehensive loss
ASBCA		Armed Services Board of Contract Appeals
ASC		Accounting Standards Codification
ASU		Accounting Standards Update
BIE		Billings in excess of costs and estimated earnings on uncompleted contracts
CAS		Cost Accounting Standards
CIE		Costs and estimated earnings in excess of billings on uncompleted contracts
CODM		Chief operating decision maker
COFC		U.S. Court of Federal Claims
DCAA		Defense Contract Audit Agency
DCMA		Defense Contract Management Agency
DoD		Department of Defense
DOJ		U.S. Department of Justice
E&C		Engineering & Construction
EBITDA		Earnings before interest, taxes, depreciation and amortization
EBIC		Egypt Basic Industries Corporation
EPC		Engineering, procurement and construction
EPIC		EPIC Piping LLC
ESPP		Employee Stock Purchase Plan
Exchange Act		Securities Exchange Act of 1934
FAR		Federal Acquisition Regulation
FASB		Financial Accounting Standards Board
FCA		False Claims Act
FKTC		First Kuwaiti Trading Company
FLNG		Floating liquefied natural gas
FPSO		Floating production, storage and offshore
FPUs		Floating production units
FSRU		Floating storage and regasification unit
GS		Government Services
GTL		Gas to liquids
HETs		Heavy equipment transporters
HTSI		Honeywell Technology Solutions Inc.
ICC		International Chamber of Commerce
Ichthys JV		Ichthys LNG project, an Australian joint venture
KTS		KBRwyle Technology Solutions, LLC
LIBOR		London interbank offered rate
LNG		Liquefied natural gas
MD&A		Management's Discussion and Analysis of Financial Condition and Results of Operations (Part I, Item 2 of this Quarterly Report on Form 10-Q)
MFRs		Memorandums of Record
MoD		Ministry of Defense



Abbreviation/Acronym		Definition
NCI		Noncontrolling interests
PEMEX		Petróleos Mexicanos
PEP		Pemex Exploration and Production
PFIs		Privately financed initiatives and projects
PIC		Paid-in capital
PPE		Property, Plant and Equipment
PSC		Private Security Contractor
RIO		Restore Iraqi Oil
SFO		U.K. Serious Fraud Office
SEC		U.S. Securities and Exchange Commission
T&C		Technology & Consulting
TSA		Transition Service Agreement
U.K.		United Kingdom
U.S.		United States
U.S. GAAP		Accounting principles generally accepted in the United States
UKMFTS		U.K. Military Flying Training System
VAT		Value-added tax
VIEs		Variable interest entities
Wyle		Wyle Inc.

PART I. FINANCIAL INFORMATION

Item 1. Financial Information

KBR, Inc.

Condensed Consolidated Statements of Operations

(In millions, except for per share data)

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Revenues	$	1,094		$	1,009		$	2,200		$	2,005
Cost of revenues	(986		)	(935		)	(2,010		)	(1,863		)
Gross profit	108			74			190			142
Equity in earnings of unconsolidated affiliates	32			33			41			62
General and administrative expenses	(38		)	(34		)	(70		)	(68		)
Asset impairment and restructuring charges	—			(12		)	—			(14		)
Gain on disposition of assets	1			2			5			6
Operating income	103			63			166			128
Interest expense	(5		)	(2		)	(10		)	(4		)
Other non-operating income (expense)	2			9			(5		)	6
Income before income taxes and noncontrolling interests	100			70			151			130
Provision for income taxes	(21		)	(23		)	(34		)	(38		)
Net income	79			47			117			92
Net income attributable to noncontrolling interests	(2		)	—			(3		)	(3		)
Net income attributable to KBR	$	77		$	47		$	114		$	89
Net income attributable to KBR per share:
Basic	$	0.54		$	0.32		$	0.80		$	0.62
Diluted	$	0.54		$	0.32		$	0.80		$	0.62
Basic weighted average common shares outstanding	141			142			142			142
Diluted weighted average common shares outstanding	141			142			142			142
Cash dividends declared per share	$	0.08		$	0.08		$	0.16		$	0.16

See accompanying notes to condensed consolidated financial statements.

KBR, Inc.

Condensed Consolidated Statements of Comprehensive Income

(In millions)

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Net income	$	79		$	47		$	117		$	92
Other comprehensive income, net of tax:
Foreign currency translation adjustments:
Foreign currency translation adjustments, net of tax	(9		)	(5		)	5			11
Reclassification adjustment included in net income	—			—			—			—
Foreign currency translation adjustments, net of taxes of $1, $(3), $5 and $(1)	(9		)	(5		)	5			11
Pension and post-retirement benefits, net of tax:
Actuarial losses, net of tax	—			—			—			—
Reclassification adjustment included in net income	7			6			13			12
Pension and post-retirement benefits, net of taxes of $(2), $(1), $(3) and $(3)	7			6			13			12
Other comprehensive income, net of tax	(2		)	1			18			23
Comprehensive income	77			48			135			115
Less: Comprehensive income attributable to noncontrolling interests	—			(1		)	(1		)	(3		)
Comprehensive income attributable to KBR	$	77		$	47		$	134		$	112

See accompanying notes to condensed consolidated financial statements.

KBR, Inc.

Condensed Consolidated Balance Sheets

(In millions, except share data)



	June 30,			December 31,
	2017			2016
	(Unaudited)
Assets
Current assets:
Cash and equivalents	$	491		$	536
Accounts receivable, net of allowance for doubtful accounts of $14 and $14	527			592
Costs and estimated earnings in excess of billings on uncompleted contracts	380			416
Claims receivable	—			400
Other current assets	97			103
Total current assets	1,495			2,047
Claims and accounts receivable	114			131
Property, plant, and equipment, net of accumulated depreciation of $324 and $324 (including net PPE of $35 and $36 owned by a variable interest entity)	139			145
Goodwill	961			959
Intangible assets, net of accumulated amortization of $114 and $100	240			248
Equity in and advances to unconsolidated affiliates	386			369
Deferred income taxes	121			118
Other assets	125			127
Total assets	$	3,581		$	4,144
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	412		$	535
Billings in excess of costs and estimated earnings on uncompleted contracts	392			552
Accrued salaries, wages and benefits	173			171
Nonrecourse project debt	9			9
Other current liabilities	213			292
Total current liabilities	1,199			1,559
Pension obligations	468			526
Employee compensation and benefits	168			113
Income tax payable	80			78
Deferred income taxes	59			149
Nonrecourse project debt	31			34
Revolving credit agreement	470			650
Deferred income from unconsolidated affiliates	98			90
Other liabilities	197			200
Total liabilities	2,770			3,399
KBR shareholders’ equity:
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and outstanding	—			—
Common stock, $0.001 par value, 300,000,000 shares authorized, 176,441,681 and 175,913,310 shares issued, and 139,877,935 and 142,803,782 shares outstanding	—			—
Paid-in capital in excess of par	2,093			2,088
Accumulated other comprehensive loss	(1,030		)	(1,050		)
Retained earnings	580			488
Treasury stock, 36,563,746 and 33,109,528 shares, at cost	(820		)	(769		)
Total KBR shareholders’ equity	823			757
Noncontrolling interests	(12		)	(12		)
Total shareholders’ equity	811			745
Total liabilities and shareholders’ equity	$	3,581		$	4,144

See accompanying notes to condensed consolidated financial statements.

KBR, Inc. Condensed Consolidated Statements of Cash Flows (In millions) (Unaudited)

	Six Months Ended June 30,
	2017			2016
Cash flows provided by (used in) operating activities:
Net income	$	117		$	92
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	27			19
Equity in earnings of unconsolidated affiliates	(41		)	(62		)
Deferred income tax (benefit) expense	(85		)	7
Other	11			—
Changes in operating assets and liabilities:
Accounts receivable, net of allowance for doubtful accounts	70			25
Costs and estimated earnings in excess of billings on uncompleted contracts	41			(28		)
Claims receivable	400			—
Accounts payable	(126		)	32
Billings in excess of costs and estimated earnings on uncompleted contracts	(167		)	(2		)
Accrued salaries, wages and benefits	2			(11		)
Reserve for loss on uncompleted contracts	(35		)	(23		)
Payments from (advances to) unconsolidated affiliates, net	5			(8		)
Distributions of earnings from unconsolidated affiliates	30			28
Income taxes payable	(5		)	(10		)
Pension funding	(18		)	(21		)
Net settlement of derivative contracts	1			(3		)
Other assets and liabilities	(17		)	(47		)
Total cash flows provided by (used in) operating activities	$	210		$	(12	)
Cash flows used in investing activities:
Purchases of property, plant and equipment	$	(6	)	$	(6	)
Proceeds from sale of assets or investments	2			1
Acquisition of businesses, net of cash acquired	2			(22		)
Other	(1		)	—
Total cash flows used in investing activities	$	(3	)	$	(27	)
Cash flows used in financing activities:
Payments to reacquire common stock	$	(52	)	$	(2	)
Distributions to noncontrolling interests	(1		)	(9		)
Payments of dividends to shareholders	(23		)	(23		)
Excess tax benefits from share-based compensation	—			1
Payments on revolving credit agreement	(180		)	—
Payments on short-term and long-term borrowings	(5		)	(5		)
Total cash flows used in financing activities	$	(261	)	$	(38	)
Effect of exchange rate changes on cash	9			(2		)
Decrease in cash and equivalents	(45		)	(79		)
Cash and equivalents at beginning of period	536			883
Cash and equivalents at end of period	$	491		$	804
Supplemental disclosure of cash flows information:
Cash paid for interest	$	11		$	4
Cash paid for income taxes (net of refunds)	$	125		$	31
Noncash financing activities
Dividends declared	$	11		$	12

See accompanying notes to condensed consolidated financial statements.

KBR, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Description of Company and Significant Accounting Policies

KBR, Inc., a Delaware corporation, was formed on March 21, 2006 and is headquartered in Houston, Texas. KBR, Inc. and its wholly owned and majority-owned subsidiaries (collectively referred to herein as "KBR", "the Company", "we", "us" or "our") is a global provider of differentiated, professional services and technologies across the asset and program life-cycle within the government services and hydrocarbons industries. Our capabilities include highly-specialized engineering services, mission and logistics support solutions, technology licensing, consulting, procurement, construction, construction management, program management, operations, maintenance and other support services to a diverse customer base, including domestic and foreign governments, international and national oil and gas companies, independent refiners, petrochemical producers, fertilizer producers and manufacturers.

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 10 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.

Certain prior year amounts have been reclassified to conform to the current year presentation on the condensed consolidated statements of operations, condensed consolidated balance sheets and the condensed consolidated statements of cash flows.

We have evaluated all events and transactions occurring after the balance sheet date but before the financial statements were issued and have included the appropriate disclosures.

Prior Period Adjustment

During the second quarter of 2017, we corrected cumulative errors resulting in an increase to "Equity in earnings of unconsolidated affiliates" and "Net income attributable to KBR" within our condensed consolidated statements of operations of $9 million and $11 million, respectively, for the three and six months ended June 30, 2017. The errors in equity of unconsolidated affiliates primarily relate to our accounting for derivatives in one of our unconsolidated variable interest entities in our GS segment from the first quarter of 2016 through the first quarter of 2017. We evaluated these cumulative errors on both a quantitative and qualitative basis under the guidance of ASC 250 - Accounting Changes and Error Corrections. We determined that the cumulative impact of the error did not affect the trend of net income, cash flows or liquidity and therefore did not have a material impact to previously issued financial statements. Additionally, we do not expect our consolidated financial statements for the current annual period to be materially impacted by the error correction.

Use of Estimates

The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the 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 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 and 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 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

Compensation. Effective January 1, 2017, we adopted ASU No. 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting which was issued by the FASB on March 31, 2016. This ASU is intended to simplify several aspects of the accounting for share-based payment transactions including (a) the income tax consequences, (b) classification of awards as either equity or liabilities, and (c) classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The adoption of ASU 2016-09 did not have a material impact on our financial statements.

Additional Balance Sheet Information

Other Current Liabilities

The components of "other current liabilities" on our condensed consolidated balance sheets as of June 30, 2017 and December 31, 2016 are presented below:



	June 30,		December 31,
Dollars in millions	2017		2016
Reserve for estimated losses on uncompleted contracts (a)	$	28	$	63
Retainage payable	41		47
Income taxes payable	40		55
Restructuring reserve	11		30
Taxes payable not based on income	14		14
Value-added tax payable	21		16
Insurance payable	16		14
Dividend payable	11		12
Other miscellaneous liabilities	31		41
Total other current liabilities	$	213	$	292


(a)	See Note 2 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 June 30, 2017 and December 31, 2016 is noncurrent deferred rent of $101 million and $103 million, respectively. Also included in "other liabilities" is a payable to our former parent of $19 million in each of the periods presented. This amount will be paid to our former parent upon receipt of a tax refund from the U.S. Internal Revenue Service.

Note 2. 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 consulting, and engineering and construction. Our two non-core business segments are our Non-strategic Business segment, which includes businesses we intend to exit upon completion of existing contracts because they are no longer a part of our future strategic focus, and "Other" which includes our corporate expenses and general and administrative expenses not allocated to the other business segments. 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 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 3 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 & Consulting. Our T&C business segment combines proprietary KBR technologies, knowledge-based services and our three specialist consulting brands, Granherne, Energo and GVA under a single customer-facing global business. This segment provides licensed technologies, know-how and consulting services to the hydrocarbons value chain, from wellhead to crude refining and through refining and petrochemicals to specialty chemicals production. In addition to sharing many of the same customers, these brands share the approach of early and continuous customer involvement to deliver an optimal solution to meet the customers' objectives through early planning and scope definition, advanced technologies, and project life-cycle support.

Engineering & Construction. Our E&C business segment provides comprehensive project and program delivery capability globally. Our key capabilities leverage our operational and technical excellence as a global provider of 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); and maintenance services (via the “Brown & Root Industrial Services” brand).

Non-strategic Business. Our Non-strategic Business segment represents the operations or activities that we intend to exit upon completion of existing contracts.

Other. Our Other business segment includes corporate expenses and general and administrative expenses not allocated to the business segments above and 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.

Operations by Reportable Segment



	Three Months Ended						Six Months Ended
	June 30,						June 30,
Dollars in millions	2017			2016			2017			2016
Revenues:
Government Services	$	543		$	229		$	1,058		$	439
Technology & Consulting	82			98			158			195
Engineering & Construction	462			621			951			1,227
Other	—			—			—			—
Subtotal	1,087			948			2,167			1,861
Non-strategic Business	7			61			33			144
Total revenues	$	1,094		$	1,009		$	2,200		$	2,005
Gross profit (loss):
Government Services	$	37		$	41		$	74		$	62
Technology & Consulting	17			15			31			32
Engineering & Construction	55			35			88			64
Other	—			—			—			—
Subtotal	109			91			193			158
Non-strategic Business	(1		)	(17		)	(3		)	(16		)
Total gross profit (loss)	$	108		$	74		$	190		$	142
Equity in earnings of unconsolidated affiliates:
Government Services (a)	$	18		$	10		$	27		$	21
Technology & Consulting	—			—			—			—
Engineering & Construction	14			23			14			41
Other	—			—			—			—
Subtotal	32			33			41			62
Non-strategic Business	—			—			—			—
Total equity in earnings of unconsolidated affiliates	$	32		$	33		$	41		$	62
Segment operating income (loss):
Government Services	$	48		$	49		$	88		$	79
Technology & Consulting	16			13			29			28
Engineering & Construction	63			40			95			77
Other	(23		)	(22		)	(43		)	(44		)
Subtotal	104			80			169			140
Non-strategic Business	(1		)	(17		)	(3		)	(12		)
Total segment operating income (loss)	$	103		$	63		$	166		$	128

(a) See Note 1 to our condensed consolidated financial statements for information related to a prior period adjustment.

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:

Government Services

There were no significant changes in project-related estimates during the three and six months ended June 30, 2017 within our GS business segment.

During the three months ended June 30, 2016, revenues, gross profit, and segment operating income included a favorable change in estimate of $33 million as a result of a settlement with the U.S. government regarding reimbursement of previously expensed legal fees associated with the sodium dichromate litigation (see Note 14 to our condensed consolidated financial statements for information related to the settlement with the U.S. government). The six months ended June 30, 2016 included a favorable change discussed above and the $15 million favorable change related to the approval of a change order on a road construction project in the Middle East in the first quarter of 2016.

Engineering & Construction

There were no significant changes in project-related estimates during the three and six months ended June 30, 2017 within our E&C business segment, except for the PEMEX and PEP arbitration settlement (see Note 15 to our condensed consolidated financial statements) which resulted in additional revenues and gross profit of $35 million.

Revenues, gross profit, and segment operating income during the three and six months ended June 30, 2016 included $36 million and $56 million, respectively, related to a favorable change in estimate resulting from a settlement on close out of an LNG project in Africa.

During the three and six months ended June 30, 2016, we recognized unfavorable changes in estimates of losses of $39 million and $70 million, respectively, on an EPC ammonia project in the U.S. primarily due to unforeseen costs related to the mechanical failure of a vendor supplied compressor and pumps that occurred during commissioning. The project was transferred to the customer in October 2016. Included in the reserve for estimated losses on uncompleted contracts, which is a component of "other current liabilities" on our condensed consolidated balance sheets, is $2 million and $3 million as of June 30, 2017 and December 31, 2016, respectively, related to this project.

During 2016, we experienced weather delays and forecast 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 and six months ended June 30, 2017. Included in the reserve for estimated losses on uncompleted contracts is $19 million and $35 million as of June 30, 2017 and December 31, 2016, respectively, related to this project. The EPC project was 78% complete as of June 30, 2017. 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 June 30, 2017.

Non-strategic Business

There were no significant changes in project-related estimates during the three and six months ended June 30, 2017 within our Non-strategic Business segment.

During the three and six months ended June 30, 2016, we recognized unfavorable changes in estimates of losses on a power project of $21 million and $26 million, respectively, primarily due to increases in subcontractor costs to complete the project as a result of poor productivity from subcontractors. The project has completed performance testing and in April 2017, care, custody and control of the project were transferred to the customer. Included in the reserve for estimated losses on uncompleted contracts is $2 million and $14 million as of June 30, 2017 and December 31, 2016, respectively, related to this project.

Note 3. Acquisitions, Dispositions and Other Transactions

Wyle and Honeywell Technology Solutions Inc. Acquisitions

During the third quarter of 2016, we acquired 100% of the equity interests of Wyle (the "Wyle acquisition") and 100% of the outstanding common stock of HTSI, which we rebranded into KTS (the "KTS acquisition" and together with the Wyle acquisition, the "Wyle and KTS acquisitions"). These acquisitions are reported within our GS business segment. The aggregate consideration paid for these acquisitions was $900 million, which was funded with $700 million in advances on our Credit Agreement and available cash on-hand. See Note 12 to our condensed consolidated financial statements for information related to our Credit Agreement.

Certain data necessary to complete the purchase price allocation of the Wyle and KTS acquisitions is not yet available and primarily relates to final tax returns that provide the underlying tax basis of assets and liabilities and the final settlement of working capital.

The following table summarizes the consideration paid for these acquisitions and the fair value of the assets acquired and liabilities assumed as of the respective acquisition dates.



Dollars in millions	Wyle		KTS
Fair value of total consideration transferred	$	623	$	280
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash	10		—
Trade receivables, net	47		29
CIE	98		93
Prepaids and other current assets	4		5
Total current assets	159		127
Property, plant and equipment, net	10		6
Intangible assets	141		70
Deferred income taxes	—		8
Total assets	310		211
Accounts payable	59		23
BIE	—		5
Other current liabilities	47		34
Total current liabilities	106		62
Deferred income taxes	52		—
Other liabilities	12		—
Total liabilities	170		62
Goodwill	$	483	$	131

For the three months ended June 30, 2017, the acquired Wyle and KTS businesses contributed $174 million and $136 million of revenues and $12 million and $9 million of gross profit, respectively. For the six months ended June 30, 2017, Wyle and KTS contributed $344 million and $265 million of revenues and $25 million and $18 million of gross profit, respectively.

The following supplemental pro forma condensed consolidated results of operations assume that Wyle and KTS had been acquired as of January 1, 2015. The supplemental pro forma financial information was prepared based on the historical financial information of Wyle and KTS and has been adjusted to give effect to pro forma adjustments that are directly attributable to the transaction. The pro forma amounts reflect certain adjustments to amortization expense and interest expense associated with the portion of the purchase price funded by $700 million in advances on our Credit Agreement and also reflect adjustments to 2016 results to exclude acquisition related costs as they are nonrecurring and are directly attributable to the transaction. The supplemental pro forma financial information presented below does not include any anticipated cost savings or expected realization of other synergies associated with the transactions. 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, 2015, nor is it indicative of future results of operations.



Dollars in millions, except per share data	Three Months Ended June 30, 2016		Six Months Ended June 30, 2016
	(Unaudited)		(Unaudited)
Revenue	$	1,397	$	2,740
Net income attributable to KBR	60		108
Diluted earnings per share	$	0.42	$	0.76

Chematur Subsidiaries Acquisition

On January 11, 2016, we acquired 100% of the outstanding common stock of three subsidiaries of Connell Chemical Industry LLC (through its subsidiary, Chematur Technologies AB). The aggregate consideration paid for the acquisition was $25 million, less $2 million of acquired cash and other adjustments resulting in net cash consideration of $23 million. We recognized goodwill of $24 million arising from the acquisition. This acquisition and its subsequent operations are reported within our T&C business segment.

Investments

UKMFTS project. In February 2016, we executed agreements to establish a new joint venture between KBR and Elbit Systems within our GS business segment, named Affinity. Affinity was awarded a service contract by a third party to procure, operate and maintain aircraft, and aircraft-related assets over an 18-year contract period, in support of the UKMFTS project. KBR owns a 50% interest in Affinity. In addition, KBR owns a 50% interest in the two joint ventures, Affinity Capital Works and Affinity Flying Services, which provide procurement, operations and management support services under subcontracts with Affinity. During the first quarter of 2016, under the terms of the subordinated debt agreement between the partners and Affinity, we advanced our proportionate share, or $14 million, to meet initial working capital needs of the venture. We expect repayment on the advance and the associated interest over the term of the project. This amount is included in "Equity in and advances to unconsolidated affiliates" in our condensed consolidated balance sheets as of June 30, 2017 and December 31, 2016, and in "Payments from (advances to) unconsolidated affiliates, net" in our consolidated statement of cash flows for the six months ended June 30, 2016.

Note 4. Cash and Equivalents

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and equivalents include cash balances held by our wholly owned subsidiaries as well as cash held by joint ventures that we consolidate. Joint venture cash balances are limited to joint venture activities and are not available for other projects, general cash needs or distribution to us without approval of the board of directors of the respective joint ventures. We expect to use joint venture cash for project costs and distributions of earnings related to joint venture operations. However, some of the earnings distributions may be paid to other KBR entities where the cash can be used for general corporate needs.

The components of our cash and equivalents balance are as follows:



	June 30, 2017
Dollars in millions	International (a)		Domestic (b)		Total
Operating cash and equivalents	$	125	$	142	$	267
Short-term investments (c)	121		42		163
Cash and equivalents held in joint ventures	58		3		61
Total	$	304	$	187	$	491



	December 31, 2016
Dollars in millions	International (a)		Domestic (b)		Total
Operating cash and equivalents	$	163	$	242	$	405
Short-term investments (c)	68		7		75
Cash and equivalents held in joint ventures	50		6		56
Total	$	281	$	255	$	536


(a)	Includes deposits held in non-U.S. operating accounts.


(b)	Includes U.S. dollar and foreign currency deposits held in operating accounts that constitute onshore cash for tax purposes but may reside either in the U.S. or in a foreign country.


(c)	Includes time deposits, money market funds, and other highly liquid short-term investments.

Note 5. Accounts Receivable

The components of our accounts receivable, net of allowance for doubtful accounts balance are as follows:



	June 30, 2017
Dollars in millions	Retainage		Trade & Other		Total
Government Services	$	7	$	190	$	197
Technology & Consulting	—		40		40
Engineering & Construction	46		236		282
Other	—		3		3
Subtotal	53		469		522
Non-strategic Business	4		1		5
Total	$	57	$	470	$	527



	December 31, 2016
Dollars in millions	Retainage		Trade & Other		Total
Government Services	$	6	$	190	$	196
Technology & Consulting	—		52		52
Engineering & Construction	53		276		329
Other	—		3		3
Subtotal	59		521		580
Non-strategic Business	5		7		12
Total	$	64	$	528	$	592

Note 6. Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts and Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts

Our CIE balances by business segment are as follows:



	June 30,		December 31,
Dollars in millions	2017		2016
Government Services	$	245	$	271
Technology & Consulting	55		30
Engineering & Construction	80		115
Subtotal	380		416
Non-strategic Business	—		—
Total	$	380	$	416

Our BIE balances by business segment are as follows:



	June 30,		December 31,
Dollars in millions	2017		2016
Government Services	$	76	$	76
Technology & Consulting	52		61
Engineering & Construction	252		388
Subtotal	380		525
Non-strategic Business	12		27
Total	$	392	$	552

Note 7. Unapproved Change Orders, Claims and Estimated Recoveries of Claims Against Suppliers and Subcontractors

The amounts of unapproved change orders, claims and estimated recoveries of claims against suppliers and subcontractors included in determining the profit or loss on contracts are as follows:



Dollars in millions	2017			2016
Amounts included in project estimates-at-completion at January 1,	$	294		$	104
Additions	280			87
Approved change orders	(3		)	(34		)
Amounts included in project estimates-at-completion at June 30,	$	571		$	157
Amounts recognized on a percentage-of-completion basis at June 30,	$	490		$	96

As of June 30, 2017, a significant portion of the change orders, customer claims and estimated recoveries of claims against suppliers and subcontractors above relate to our proportionate share of unapproved change orders and claims associated with our 30% ownership interest in the Ichthys JV, which has contracted to perform the engineering, procurement, supply, construction and commissioning of onshore LNG facilities for a client in Darwin, Australia. The contract between the Ichthys JV and its client is a hybrid contract containing both cost-reimbursable and fixed-price (including unit-rate) scopes.

These additional change orders, customer claims, estimated recoveries of claims against suppliers and subcontractors and additional costs have resulted in a reduction to our percentage of completion progress for the six months ended June 30, 2017.

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. It is anticipated that these commercial matters may not be resolved in the near term.

Our estimates for the above unapproved change orders, customer claims and estimated recoveries of claims against suppliers and subcontractors may prove inaccurate resulting in significant changes to our estimated revenue, costs and profits at completion

on the underlying projects. Contingencies related to the Ichthys JV are discussed further in Note 15 to our condensed consolidated financial statements.

Liquidated damages

Some of our engineering and construction contracts have schedule dates and performance obligations that if not met could subject us to penalties for liquidated damages. These generally relate to specified activities that must be completed by a set contractual date or by achievement of a specified level of output or throughput. Each contract defines the conditions under which a customer may make a claim for liquidated damages. However, in some instances, liquidated damages are not asserted by the customer, but the potential to do so is used in negotiating or settling claims and closing out the contract. Any accrued liquidated damages are recognized as a reduction in revenues in our condensed consolidated statements of operations.

It is possible that liquidated damages related to several projects totaling $10 million and $8 million at June 30, 2017 and December 31, 2016, 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 and, therefore, they have not been recognized.

Note 8. Claims and Accounts Receivable

Our claims and accounts receivable balance not expected to be collected within the next 12 months was $114 million and $131 million as of June 30, 2017 and December 31, 2016, respectively. Claims and accounts receivable primarily reflects claims filed with the U.S. government related to payments not yet received for costs incurred under various U.S. government contracts within our GS business segment. These claims relate to disputed costs or contracts where our costs have exceeded the U.S. government's funded value on the task order. Included in the amount is $83 million as of June 30, 2017 and December 31, 2016 related to Form 1s issued by the U.S. government questioning or objecting to costs billed to them. See Note 14 of our condensed consolidated financial statements for additional discussions. The amount also includes $31 million and $48 million as of June 30, 2017 and December 31, 2016, respectively, related to contracts where our costs have exceeded the U.S. government's funded values on the underlying task orders or task orders where the U.S. government has not authorized us to bill. We believe the remaining disputed costs will be resolved in our favor, at which time the U.S. government will be required to obligate funds from appropriations for the year in which resolution occurs.

Note 9. 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, 2016	$	8
Charges	—
Payments	(5		)
Balance at June 30, 2017	$	3

Balance at December 31, 2015	$	19
Charges