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false--12-31Q320170001357615Large Accelerated Filer00300000050000002040000002490000000.00750.0037510000009000000190000000.002250.001250.013750.0175P10D0.0050.010.5360000003500000032400000032300000000000014000000140000000.00130000000030000000017591331017652753914280378214007919310000000011900000083000000Amounts drawn under the Credit Agreement will bear interest at variable rates, per annum, based either on (i)?the LIBOR plus an applicable margin of 1.375% to 1.75%, or (ii)?a base rate plus an applicable margin of 0.375% to 0.75%, with the base rate equal to the highest of (a)?reference bank?s publicly announced base rate, (b)?the Federal Funds Rate plus 0.5%, or (c)?LIBOR plus 1%. The amount of the applicable margin to be applied will be determined by the Company?s ratio of consolidated debt to consolidated EBITDA for the prior four fiscal quarters as defined in the Credit Agreement. The Credit Agreement provides for fees on letters of credit issued under the Credit Agreement at a rate equal to the applicable margin for LIBOR-based loans, except for performance letters of credit, which are priced at 50% of such applicable margin. 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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 September 30, 2017
OR
¨
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
 
 
 
kbrlogoa29.gif
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, 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) of 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 October 12, 2017, there were 140,079,609 shares of KBR, Inc. Common Stock, par value $0.001 per share, outstanding.

 





TABLE OF CONTENTS
 
 
 
 
Page
 
Condensed Consolidated Statements of Operations
Condensed Consolidated Balance Sheets
 



2



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.


3



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
 
JKC Australia LNG, an Australian joint venture executing the Ichthys LNG project
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
NCI
 
Noncontrolling interests

4



Abbreviation/Acronym
 
Definition
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.


5



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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
1,034

 
$
1,073

 
$
3,234

 
$
3,078

Cost of revenues
(947
)
 
(1,109
)
 
(2,957
)
 
(2,972
)
Gross profit (loss)
87

 
(36
)
 
277

 
106

Equity in earnings of unconsolidated affiliates
23

 
19

 
64

 
81

General and administrative expenses
(37
)
 
(43
)
 
(107
)
 
(111
)
Asset impairment and restructuring charges

 
(7
)
 

 
(21
)
Gain on disposition of assets

 

 
5

 
6

Operating income (loss)
73

 
(67
)
 
239

 
61

Interest expense
(6
)
 
(3
)
 
(16
)
 
(7
)
Other non-operating income (expense)
(4
)
 
2

 
(9
)
 
8

Income (loss) before income taxes and noncontrolling interests
63

 
(68
)
 
214

 
62

Benefit (provision) for income taxes
(16
)
 
11

 
(50
)
 
(27
)
Net income (loss)
47

 
(57
)
 
164

 
35

Net income attributable to noncontrolling interests
(2
)
 
(6
)
 
(5
)
 
(9
)
Net income (loss) attributable to KBR
$
45

 
$
(63
)
 
$
159

 
$
26

Net income (loss) attributable to KBR per share
 
 
 
 
 
 
 
Basic
$
0.32

 
$
(0.44
)
 
$
1.12

 
$
0.18

Diluted
$
0.32

 
$
(0.44
)
 
$
1.12

 
$
0.18

Basic weighted average common shares outstanding
140

 
142

 
141

 
142

Diluted weighted average common shares outstanding
140

 
142

 
141

 
142

Cash dividends declared per share
$
0.08

 
$
0.08

 
$
0.24

 
$
0.24

See accompanying notes to condensed consolidated financial statements.

6



KBR, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In millions)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss)
$
47

 
$
(57
)
 
$
164

 
$
35

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax
2

 
10

 
7

 
21

Reclassification adjustment included in net income

 

 

 

Foreign currency translation adjustments, net of taxes of $1, $2, $7 and $2
2

 
10

 
7

 
21

Pension and post-retirement benefits, net of tax:
 
 
 
 
 
 
 
Actuarial losses, net of tax

 

 

 

Reclassification adjustment included in net income
5

 
6

 
18

 
18

Pension and post-retirement benefits, net of taxes of $(2), $(1), $(4) and $(4)
5

 
6

 
18

 
18

Changes in fair value of derivatives:
 
 
 
 
 
 
 
Changes in fair value of derivatives, net of tax
1

 

 
1

 

Reclassification adjustment included in net income
(1
)
 
(1
)
 
(1
)
 
(1
)
Changes in fair value of derivatives, net of taxes of $0, $0, $0 and $0

 
(1
)
 

 
(1
)
Other comprehensive income, net of tax
7

 
15

 
25

 
38

Comprehensive income (loss)
54

 
(42
)
 
189

 
73

Less: Comprehensive income attributable to noncontrolling interests
(3
)
 
(5
)
 
(4
)
 
(8
)
Comprehensive income (loss) attributable to KBR
$
51

 
$
(47
)
 
$
185

 
$
65

See accompanying notes to condensed consolidated financial statements.


7



KBR, Inc.
Condensed Consolidated Balance Sheets
(In millions, except share data)
 
September 30,
 
December 31,
 
2017
 
2016
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and equivalents
$
511

 
$
536

Accounts receivable, net of allowance for doubtful accounts of $14 and $14
501

 
592

Costs and estimated earnings in excess of billings on uncompleted contracts
412

 
416

Claims receivable

 
400

Other current assets
94

 
103

Total current assets
1,518

 
2,047

Claims and accounts receivable
100

 
131

Property, plant, and equipment, net of accumulated depreciation of $323 and $324 (including net PPE of $35 and $36 owned by a variable interest entity)
134

 
145

Goodwill
965

 
959

Intangible assets, net of accumulated amortization of $119 and $100
237

 
248

Equity in and advances to unconsolidated affiliates
401

 
369

Deferred income taxes
122

 
118

Other assets
124

 
127

Total assets
$
3,601

 
$
4,144

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
398

 
$
535

Billings in excess of costs and estimated earnings on uncompleted contracts
360

 
552

Accrued salaries, wages and benefits
211

 
171

Nonrecourse project debt
10

 
9

Other current liabilities
193

 
292

Total current liabilities
1,172

 
1,559

Pension obligations
520

 
526

Employee compensation and benefits
116

 
113

Income tax payable
81

 
78

Deferred income taxes
66

 
149

Nonrecourse project debt
32

 
34

Revolving credit agreement
470

 
650

Deferred income from unconsolidated affiliates
98

 
90

Other liabilities
188

 
200

Total liabilities
2,743

 
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, 176,527,539 and 175,913,310 shares issued, and 140,079,193 and 142,803,782 shares outstanding

 

Paid-in capital in excess of par
2,095

 
2,088

Accumulated other comprehensive loss
(1,024
)
 
(1,050
)
Retained earnings
613

 
488

Treasury stock, 36,448,346 and 33,109,528 shares, at cost
(817
)
 
(769
)
Total KBR shareholders’ equity
867

 
757

Noncontrolling interests
(9
)
 
(12
)
Total shareholders’ equity
858

 
745

Total liabilities and shareholders’ equity
$
3,601

 
$
4,144

See accompanying notes to condensed consolidated financial statements.

8



KBR, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
 
Nine Months Ended September 30,
 
2017
 
2016
Cash flows provided by operating activities:
 
 
 
Net income
$
164

 
$
35

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
38

 
31

Equity in earnings of unconsolidated affiliates
(64
)
 
(81
)
Deferred income tax (benefit) expense
(75
)
 
7

Other
20

 
4

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net of allowance for doubtful accounts
100

 
9

Costs and estimated earnings in excess of billings on uncompleted contracts
11

 
25

Claims receivable
400

 

Accounts payable
(144
)
 
39

Billings in excess of costs and estimated earnings on uncompleted contracts
(207
)
 
14

Accrued salaries, wages and benefits
39

 
(19
)
Reserve for loss on uncompleted contracts
(43
)
 
(15
)
Payments from (advances to) unconsolidated affiliates, net
6

 
(3
)
Distributions of earnings from unconsolidated affiliates
41

 
43

Income taxes payable
(7
)
 
(19
)
Pension funding
(28
)
 
(31
)
Net settlement of derivative contracts
4

 
(8
)
Other assets and liabilities
(17
)
 
(23
)
Total cash flows provided by operating activities
$
238

 
$
8

Cash flows used in investing activities:
 
 
 
Purchases of property, plant and equipment
$
(6
)
 
$
(8
)
Proceeds from sale of assets or investments
2

 
2

Payments for investments in equity method joint ventures

 
(5
)
Acquisition of businesses, net of cash acquired
2

 
(911
)
Other
(2
)
 

Total cash flows used in investing activities
$
(4
)
 
$
(922
)
Cash flows provided by (used in) financing activities:
 
 
 
Payments to reacquire common stock
$
(52
)
 
$
(2
)
Distributions to noncontrolling interests
(1
)
 
(9
)
Payments of dividends to shareholders
(34
)
 
(34
)
Borrowings on revolving credit agreement

 
700

Payments on revolving credit agreement
(180
)
 
(50
)
Payments on short-term and long-term borrowings
(5
)
 
(5
)
Total cash flows provided by (used in) financing activities
$
(272
)
 
$
600

Effect of exchange rate changes on cash
13

 

Decrease in cash and equivalents
(25
)
 
(314
)
Cash and equivalents at beginning of period
536

 
883

Cash and equivalents at end of period
$
511

 
$
569

Supplemental disclosure of cash flows information:
 
 
 
Cash paid for interest
$
16

 
$
7

Cash paid for income taxes (net of refunds)
$
128

 
$
31

Noncash financing activities
 
 
 
Dividends declared
$
11

 
$
12

See accompanying notes to condensed consolidated financial statements.

9



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 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 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

As originally disclosed in our June 30, 2017 Form 10-Q, 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. The errors in equity in earnings of unconsolidated affiliates primarily relate to our accounting for derivatives in one of our unconsolidated VIEs in our GS segment from the first quarter of 2016 through the first quarter of 2017. We evaluated these cumulative errors on both a quantitative and qualitative basis under the guidance of ASC 250 - Accounting Changes and Error Corrections. We determined that the cumulative impact of the errors 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, 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

10



valuation of pension obligations and pension assets
accruals for estimated liabilities, including litigation accruals
consolidation of VIEs
valuation of share-based compensation
valuation of assets and liabilities acquired in business combinations

In accordance with normal practice in the construction industry, we include in current assets and current liabilities certain amounts related to construction contracts realizable and payable over a period in excess of one year. If the underlying estimates and assumptions upon which the financial statements are based change in the future, actual amounts may differ from those included in the accompanying condensed consolidated financial statements.

Adoption of New Accounting Standards

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 September 30, 2017 and December 31, 2016 are presented below:
 
September 30,
 
December 31,
Dollars in millions
2017
 
2016
Reserve for estimated losses on uncompleted contracts (a)
$
20

 
$
63

Retainage payable
37

 
47

Income taxes payable
37

 
55

Restructuring reserve
8

 
30

Taxes payable not based on income
13

 
14

Value-added tax payable
17

 
16

Insurance payable
13

 
14

Dividend payable
11

 
12

Other miscellaneous liabilities
37

 
41

Total other current liabilities
$
193

 
$
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 September 30, 2017 and December 31, 2016 is noncurrent deferred rent of $100 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.



11



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 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 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.
In October 2017, we entered into a definitive agreement to acquire 100% of the outstanding stock of Sigma Bravo Pty Ltd, a leading provider of high-end, information and communication technology services specializing in mission planning systems and solutions to the Australian Defence Force. The estimated purchase price is $10 million and the transaction is expected to close in the fourth quarter of 2017. The acquisition will become a KBRwyle company and expands our Government Services business in Australia.

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 hydrocarbons business.  This segment provides licensed technologies, know-how and consulting services across the hydrocarbons value chain, from wellhead to crude refining and through refining and petrochemicals to specialty chemicals production.  In addition to sharing many of the same customers, these brands share the approach of early and continuous customer involvement to deliver an optimal solution to meet the customers' objectives through early planning and scope definition, advanced technologies, and project life-cycle support.
Engineering & Construction. 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. All Non-Strategic Business projects are substantially complete as of September 30, 2017. We continue to finalize project close-out activities and negotiate the settlement of claims and various other matters associated with these projects.
Other. Our Other business segment includes corporate expenses and general and administrative expenses not allocated to the business segments above and would include any future activities that do not individually meet the criteria for segment presentation. 

The following table presents revenues, gross profit (loss), equity in earnings of unconsolidated affiliates, and operating income (loss) by reporting segment.

12



Operations by Reportable Segment
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
Dollars in millions
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Government Services
$
582

 
$
401

 
$
1,640

 
$
840

Technology & Consulting
78

 
67

 
236

 
262

Engineering & Construction
370

 
595

 
1,321

 
1,822

Other

 

 

 

Subtotal
1,030

 
1,063

 
3,197

 
2,924

Non-strategic Business
4

 
10

 
37

 
154

Total revenues
$
1,034

 
$
1,073

 
$
3,234

 
$
3,078

Gross profit (loss):
 
 
 
 
 
 
 
Government Services
$
39

 
$
32

 
$
113

 
$
94

Technology & Consulting
20

 
17

 
51

 
49

Engineering & Construction
25

 
1

 
113

 
65

Other

 

 

 

Subtotal
84

 
50

 
277

 
208

Non-strategic Business
3

 
(86
)
 

 
(102
)
Total gross profit (loss)
$
87

 
$
(36
)
 
$
277

 
$
106

Equity in earnings of unconsolidated affiliates:
 
 
 
 
 
 
 
Government Services (a)
$
14

 
$
8

 
$
41

 
$
29

Technology & Consulting

 

 

 

Engineering & Construction
9

 
11

 
23

 
52

Other

 

 

 

Subtotal
23

 
19

 
64

 
81

Non-strategic Business

 

 

 

Total equity in earnings of unconsolidated affiliates
$
23

 
$
19

 
$
64

 
$
81

Segment operating income (loss):
 
 
 
 
 
 
 
Government Services
$
48

 
$
25

 
$
136

 
$
104

Technology & Consulting
19

 
16

 
48

 
44

Engineering & Construction
25

 
(2
)
 
120

 
76

Other
(22
)
 
(21
)
 
(65
)
 
(65
)
Subtotal
70

 
18

 
239

 
159

Non-strategic Business
3

 
(85
)
 

 
(98
)
Total segment operating income (loss)
$
73

 
$
(67
)
 
$
239

 
$
61


 

(a) See Note 1 to our condensed consolidated financial statements for information related to a prior period adjustment in the second quarter of 2017.

Changes in Project-related Estimates

There are many factors that may affect the accuracy of our cost estimates and ultimately our future profitability. These include, but are not limited to, the availability and costs of resources (such as labor, materials and equipment), productivity and weather, and for unit rate and construction service contracts, the availability and detail of customer supplied engineering drawings. With a portfolio of more than one thousand contracts, we 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:


13



Government Services

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

During the nine months ended September 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). Additionally, we recognized a $15 million favorable change to gross profit related to the approval of a change order on a road construction project in the Middle East. The change order resulted in an extension of the contract terms and increased the total contract value.

Engineering & Construction

There were no significant changes in project-related estimates during the three and nine months ended September 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 in the nine months ended September 30, 2017.

During the three and nine months ended September 30, 2016, we recognized $9 million of additional gross profit resulting from a favorable change in estimate resulting from the final settlement of outstanding claims on a legacy project in Canada.

Revenues, gross profit, and segment operating income during the three and nine months ended September 30, 2016 included $3 million and $59 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 nine months ended September 30, 2016, we recognized unfavorable changes in estimates of losses of $40 million and $110 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 September 30, 2017 and December 31, 2016, respectively, related to this project.

During 2016, we experienced weather delays as well as construction productivity rates less than previously expected on a downstream EPC project in the U.S. These issues delayed estimated completion of the project until 2018, which resulted in additional estimated costs to complete and recognition of liquidated damages which caused this project to become a loss project in the fourth quarter of 2016. There were no significant changes in estimated losses on this project during the three and nine months ended September 30, 2017. Included in the reserve for estimated losses on uncompleted contracts is $13 million and $35 million as of September 30, 2017 and December 31, 2016, respectively, related to this project. The EPC project was 85% complete as of September 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 September 30, 2017.

Non-strategic Business

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

During the three and nine months ended September 30, 2016, we recognized unfavorable changes in estimates of losses on a power project of $86 million and $112 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 September 30, 2017 and December 31, 2016, respectively, related to this project.



14



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 (the "HTSI acquisition") and together with the Wyle acquisition, the "Wyle and HTSI 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.

During the third quarter of 2017, we completed the purchase accounting for the Wyle and HTSI acquisitions. In the same period, we made adjustments to reflect the final working capital settlement and the finalization of various immaterial contingencies for the Wyle and HTSI acquisitions. The net impacts of the Wyle adjustments were increases to liabilities and goodwill of $1 million. The net impacts of the HTSI adjustments were increases to goodwill, other assets, and liabilities of $2 million, $2 million and $4 million, respectively.

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
 
HTSI
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

 
7

Total current assets
159

 
129

Property, plant and equipment, net
10

 
6

Intangible assets
141

 
70

Deferred income taxes

 
8

Total assets
310

 
213

Accounts payable
61

 
23

BIE

 
10

Other current liabilities
47

 
33

Total current liabilities
108

 
66

Deferred income taxes
51

 

Other liabilities
12

 

Total liabilities
171

 
66

Goodwill
$
484

 
$
133



For the three months ended September 30, 2017, the acquired Wyle and HTSI businesses contributed $179 million and $136 million of revenues and $15 million and $5 million of gross profit, respectively. For the nine months ended September 30, 2017, Wyle and HTSI contributed $523 million and $401 million of revenues and $40 million and $23 million of gross profit, respectively.


15



The following supplemental pro forma condensed consolidated results of operations assume that Wyle and HTSI 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 HTSI 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 September 30, 2016
 
Nine Months Ended September 30, 2016
 
(Unaudited)
 
(Unaudited)
Revenue
$
1,199

 
$
3,939

Net income (loss) attributable to KBR
(54
)
 
54

Diluted earnings per share
$
(0.38
)
 
$
0.38



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. The contract has been determined to contain a leasing arrangement and various other services between the joint venture and the customer. KBR owns a 50% interest in Affinity, which is accounted for under the equity method of accounting. 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 September 30, 2017 and December 31, 2016, and in "Payments from (advances to) unconsolidated affiliates, net" in our consolidated statement of cash flows for the nine months ended September 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.


16



The components of our cash and equivalents balance are as follows:
 
September 30, 2017
Dollars in millions
International (a)
 
Domestic (b)
 
Total
Operating cash and equivalents
$
134

 
$
144

 
$
278

Short-term investments (c)
97

 
68

 
165

Cash and equivalents held in joint ventures
65

 
3

 
68

Total
$
296

 
$
215

 
$
511


 
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:
 
September 30, 2017
Dollars in millions
Retainage
 
Trade & Other
 
Total
Government Services
$
6

 
$
179

 
$
185

Technology & Consulting

 
53

 
53

Engineering & Construction
49

 
209

 
258

Other

 

 

Subtotal
55

 
441

 
496

Non-strategic Business
4

 
1

 
5

Total
$
59

 
$
442

 
$
501


 
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




17



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:
 
September 30,
 
December 31,
Dollars in millions
2017
 
2016
Government Services
$
282

 
$
271

Technology & Consulting
54

 
30

Engineering & Construction
76

 
115

Subtotal
412

 
416

Non-strategic Business

 

Total
$
412

 
$
416


Our BIE balances by business segment are as follows:
 
September 30,
 
December 31,
Dollars in millions
2017
 
2016
Government Services
$
82

 
$
76

Technology & Consulting
44

 
61

Engineering & Construction
226

 
388

Subtotal
352

 
525

Non-strategic Business
8

 
27

Total
$
360

 
$
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
483

 
33

Approved change orders