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 March 31, 2018



¨	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, 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 April 12, 2018, there were 140,625,084 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	11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3. Quantitative and Qualitative Disclosures About Market Risk	55
Item 4. Controls and Procedures	55
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	56
Item 1A. Risk Factors	56
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 6. Exhibits	57
SIGNATURES	58

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 2017 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:



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
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
EBIC		Egypt Basic Industries Corporation
EBITDA		Earnings before interest, taxes, depreciation and amortization
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
FEED		Front end engineering and design
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
HS		Hydrocarbons Services
HTSI		Honeywell Technology Solutions Inc.
ICC		International Chamber of Commerce
JKC		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 for Record
MoD		Ministry of Defense



Acronym		Definition
NCI		Noncontrolling interests
PFIs		Privately financed initiatives and projects
PIC		Paid-in capital
PLOC		Performance Letter of Credit facility
PPE		Property, Plant and Equipment
PSC		Private Security Contractor
RIO		Restore Iraqi Oil
SEC		U.S. Securities and Exchange Commission
SFO		U.K. Serious Fraud Office
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

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
	March 31,
	2018			2017
Revenues	$	1,038		$	1,106
Cost of revenues	(957		)	(1,024		)
Gross profit	81			82
Equity in earnings of unconsolidated affiliates	23			9
General and administrative expenses	(35		)	(32		)
Acquisition and integration related costs	(3		)	—
Gain on disposition of assets	—			4
Gain on consolidation of Aspire entities	115			—
Operating income	181			63
Interest expense	(6		)	(5		)
Other non-operating expense	(2		)	(7		)
Income before income taxes and noncontrolling interests	173			51
Provision for income taxes	(34		)	(13		)
Net income	139			38
Net income attributable to noncontrolling interests	(1		)	(1		)
Net income attributable to KBR	$	138		$	37
Net income attributable to KBR per share:
Basic	$	0.98		$	0.26
Diluted	$	0.97		$	0.26
Basic weighted average common shares outstanding	140			143
Diluted weighted average common shares outstanding	140			143
Cash dividends declared per share	$	0.08		$	0.08

See accompanying notes to condensed consolidated financial statements.

KBR, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In millions)

(Unaudited)



	Three Months Ended
	March 31,
	2018			2017
Net income	$	139		$	38
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments:
Foreign currency translation adjustments, net of tax	(2		)	14
Reclassification adjustment included in net income	5			—
Foreign currency translation adjustments, net of taxes of $(1) and $4	3			14
Pension and post-retirement benefits, net of tax:
Actuarial losses, net of tax	—			—
Reclassification adjustment included in net income	6			6
Pension and post-retirement benefits, net of taxes of $(1) and $(2)	6			6
Other comprehensive income, net of tax	9			20
Comprehensive income	148			58
Less: Comprehensive income attributable to noncontrolling interests	(1		)	(1		)
Comprehensive income attributable to KBR	$	147		$	57

See accompanying notes to condensed consolidated financial statements.

KBR, Inc.

Condensed Consolidated Balance Sheets

(In millions, except share data)



	March 31,			December 31,
	2018			2017
	(Unaudited)
Assets
Current assets:
Cash and equivalents	$	486		$	439
Accounts receivable, net of allowance for doubtful accounts of $12 and $12	810			510
Contract assets	235			383
Other current assets	102			93
Total current assets	1,633			1,425
Claims and accounts receivable	106			101
Property, plant, and equipment, net of accumulated depreciation of $336 and $329 (including net PPE of $43 and $34 owned by a variable interest entity)	142			130
Goodwill	1,011			968
Intangible assets, net of accumulated amortization of $128 and $122	486			239
Equity in and advances to unconsolidated affiliates	566			387
Deferred income taxes	289			300
Other assets	131			124
Total assets	$	4,364		$	3,674
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	475		$	350
Contract liabilities	502			368
Accrued salaries, wages and benefits	186			186
Nonrecourse project debt	11			10
Other current liabilities	146			157
Total current liabilities	1,320			1,071
Pension obligations	392			391
Employee compensation and benefits	102			118
Income tax payable	86			85
Deferred income taxes	81			18
Nonrecourse project debt	29			28
Revolving credit agreement	540			470
Deferred income from unconsolidated affiliates	—			101
Other liabilities	183			171
Total liabilities	2,733			2,453
KBR shareholders’ equity:
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and outstanding	—			—
Common stock, $0.001 par value 300,000,000 shares authorized,177,169,755 and 176,638,882 shares issued, and 140,624,668 and 140,166,589 shares outstanding	—			—
Paid-in capital in excess of par ("PIC")	2,094			2,091
Accumulated other comprehensive loss	(912		)	(921		)
Retained earnings	1,148			877
Treasury stock, 36,545,087 shares and 36,472,293 shares, at cost	(818		)	(818		)
Total KBR shareholders’ equity	1,512			1,229
Noncontrolling interests	119			(8		)
Total shareholders’ equity	1,631			1,221
Total liabilities and shareholders’ equity	$	4,364		$	3,674

See accompanying notes to condensed consolidated financial statements.

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

	Three Months Ended March 31,
	2018			2017
Cash flows from operating activities:
Net income	$	139		$	38
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	13			13
Equity in earnings of unconsolidated affiliates	(23		)	(9		)
Deferred income tax expense	25			5
Gain on consolidation of Aspire entities	(115		)	—
Other	11			6

Changes in operating assets and liabilities:
Accounts receivable, net of allowance for doubtful accounts	(134		)	38
Contract assets	(44		)	4
Accounts payable	63			(75		)
Contract liabilities	(32		)	(124		)
Accrued salaries, wages and benefits	2			16
Reserve for loss on uncompleted contracts	(3		)	(22		)
Payments from unconsolidated affiliates, net	1			1
Distributions of earnings from unconsolidated affiliates	1			14
Income taxes payable	12			6
Pension funding	(10		)	(9		)
Subcontractor advances	(1		)	—
Net settlement of derivative contracts	3			(2		)
Other assets and liabilities	(38		)	(15		)
Total cash flows used in operating activities	$	(130	)	$	(115	)
Cash flows from investing activities:
Purchases of property, plant and equipment	$	(9	)	$	(3	)
Payments for investments in equity method joint ventures	(72		)	—
Acquisition of businesses, net of cash acquired	—			2
Increase in cash due to consolidation of Aspire entities	205			—
Other	1			—
Total cash flows provided by (used in) investing activities	$	125		$	(1	)

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

	Three Months Ended March 31,
	2018			2017
Cash flows from financing activities:
Payments to reacquire common stock	$	(2	)	$	(2	)
Acquisition of noncontrolling interest	(6		)	—
Distributions to noncontrolling interests	—			(1		)
Payments of dividends to shareholders	(11		)	(12		)
Borrowings on revolving credit agreement	70			—
Other	—			—
Total cash flows provided by (used in) financing activities	$	51		$	(15	)
Effect of exchange rate changes on cash	1			5
Increase (decrease) in cash and equivalents	47			(126		)
Cash and equivalents at beginning of period	439			536
Cash and equivalents at end of period	$	486		$	410
Supplemental disclosure of cash flows information:
Cash paid for interest	$	3		$	6
Cash paid for income taxes (net of refunds)	$	4		$	3
Noncash financing activities
Dividends declared	$	11		$	12

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 research and development, feasibility and solutions development, specialized technical consulting, systems integration, engineering and design service, process technologies, program management, construction services, commissioning and startup services, highly specialized mission and logistics support solutions, and asset operations and maintenance services and other support services to a diverse customer base, including government and military organizations of the U.S., U.K. and Australia and a wide range of customers across the hydrocarbons value chain.

Principles of Consolidation

Our condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of KBR and our wholly owned and majority-owned subsidiaries and VIEs of which we are the primary beneficiary. We account for investments over which we have significant influence but not a controlling financial interest using the equity method of accounting. See Note 12 to our condensed consolidated financial statements for further discussion on our equity investments and VIEs. The cost method is used when we do not have the ability to exert significant influence. All material intercompany balances and transactions are eliminated in consolidation.

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

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

Segment Reorganization

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

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


•	Government Services


•	Technology


•	Hydrocarbons Services


•	Non-Strategic Business


•	Other

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

Use of Estimates

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

during the reporting period. Actual results could differ from those estimates. Areas requiring significant estimates and assumptions by our management include but are not limited to the following:


•	project revenues, costs and profits on engineering and construction contracts, including recognition of estimated losses on uncompleted contracts


•	project revenues, award fees, costs and profits on government services contracts


•	provisions for uncollectible receivables


•	provisions for client claims and recoveries of costs from subcontractors, vendors and others


•	provisions for income taxes and related valuation allowances and tax uncertainties


•	recoverability of goodwill


•	recoverability of other intangibles and long-lived assets and related estimated lives


•	recoverability of equity method and cost method investments


•	valuation of pension obligations and pension assets


•	accruals for estimated liabilities, including litigation accruals


•	consolidation of VIEs


•	valuation of share-based compensation


•	valuation of assets and liabilities acquired in business combinations

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

Adoption of New Accounting Standards

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

We recognized the cumulative effect of initially applying ASC 606 as an adjustment to retained earnings in the balance sheet as of January 1, 2018 as follows:



	Balance at		Adjustments Due to			Balance at
Dollars in millions	December 31, 2017		ASC 606			January 1, 2018
Assets
Accounts receivable	$	510	$	157		$	667
Contract assets	383		(191		)	192
Other current assets	93		5			98
Equity in and advances to unconsolidated affiliates	387		87			474
Deferred income taxes	300		(6		)	294
Other assets	124		1			125

Liabilities
Contract liabilities	368		9			377
Deferred income from unconsolidated affiliates	101		(101		)	—
Other liabilities	171		1			172

Equity
Retained Earnings	877		144			1,021

The impact of adoption on our consolidated statement of operations, balance sheet and cash flows for the period ended March 31, 2018 was as follows:



	For the period ended March 31, 2018
	As		Balances Without		Effect of Change
Dollars in millions	Reported		Adoption of ASC 606		Higher/(Lower)
Statement of Operations
Revenues	$	1,038	$	1,036	$	2
Income before income taxes and noncontrolling interests	173		172		1
Net income	139		138		1

EPS
Basic	$	0.98	$	0.97	$	0.01
Diluted	$	0.97	$	0.97	$	—



	As of March 31, 2018
	As			Balances Without			Effect of Change
Dollars in millions	Reported			Adoption of ASC 606			Higher/(Lower)
Assets
Accounts receivable	$	810		$	601		$	209
Contract assets	235			446			(211		)
Other current assets	102			98			4
Equity in and advances to unconsolidated affiliates	566			562			4
Deferred income taxes	289			296			(7		)

Liabilities
Contract liabilities	502			550			(48		)
Deferred income from unconsolidated affiliates	—			104			(104		)

Equity
Retained earnings	1,148			1,000			148
Accumulated other comprehensive loss	(912		)	(915		)	3



	For the period ended March 31, 2018
	As			Balances Without			Effect of Change
Dollars in millions	Reported			Adoption of ASC 606			Higher/(Lower)
Cash flows from operating activities
Net income	$	139		$	138		$	1
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in earnings of unconsolidated affiliates	(23		)	(23		)	—
Deferred income tax (benefit) expense	25			25			—

Changes in operating assets and liabilities, net of acquired businesses:
Accounts receivable, net of allowances for doubtful accounts	(134		)	74			(208		)
Contract assets	(44		)	(255		)	211
Contract liabilities	(32		)	(28		)	(4		)
Other assets and liabilities	(38		)	(38		)	—
Total cash flows used in operating activities	(130		)	(130		)	—

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

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

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

Additional Balance Sheet Information

Other Current Liabilities

The components of "Other current liabilities" on our condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017 are presented below:



	March 31,		December 31,
Dollars in millions	2018		2017
Reserve for estimated losses on uncompleted contracts (a)	$	12	$	15
Retainage payable	31		30
Income taxes payable	23		17
Restructuring reserve	7		9
Taxes payable not based on income	10		11
Value-added tax payable	14		13
Insurance payable	3		9
Dividend payable	11		11
Other miscellaneous liabilities	35		42
Total other current liabilities	$	146	$	157


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

Other Liabilities

Included in "Other liabilities" on our condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017 is noncurrent deferred rent of $97 million and $99 million, respectively. Also included in "Other liabilities" is a payable to our former parent of $5 million as of March 31, 2018 and December 31, 2017, respectively.

Note 2. Significant Accounting Policies

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

Revenue Recognition

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

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

For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. In cases where we do not provide the distinct good or service on a standalone basis, the primary method used to estimate standalone selling price is the expected

cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service.

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

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

Government Services

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

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

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

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

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

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

Hydrocarbons Services

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

It is common for our hydrocarbons services contracts to contain incentive fees, performance bonuses, penalties (liquidated damages) or other provisions, including claims and change orders, that may either increase or decrease the transaction price.

Incentives and other performance bonuses generally are awarded upon achievement of certain performance metrics, program milestones or cost targets. Liquidated damage penalties in our contracts are generally capped at a percentage of the contract value. Liquidated damages may be related to schedule delays, typically calculated based on a daily rate, or tied to performance guarantees.

Substantially all of our performance obligations related to hydrocarbons services contracts are satisfied over time as work progresses. Typically, revenue is recognized over time using the cost-to-cost input measure to measure progress because it best depicts the transfer of goods and services to the customer which occurs as we incur costs on our contracts. Contract costs include all direct material and labor costs and those indirect costs related to contract performance. Indirect costs, included in cost of revenues, include charges for such items as facilities, engineering, project management, quality control, bids and proposals and procurement.

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

Technology

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

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

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

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

Contract Estimates

Contract Modifications

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

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

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

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

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

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

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

Claims Against Vendors and Subcontractors

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

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

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

Accounts receivable

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

We establish an allowance for doubtful accounts based on the assessment of our clients' willingness and ability to pay. In addition to such allowances, there are often items in dispute or being negotiated that may require us to make an estimate as to the ultimate outcome. Past due receivable balances are written off when our internal collection efforts have been unsuccessful in collecting the amounts due.

Contract assets and liabilities

Billing practices are governed by the contract terms of each project based upon costs incurred, achievement of milestones or pre-agreed schedules. Billings do not necessarily correlate with revenue recognized using the cost-to-cost method of revenue recognition. Contract assets include unbilled amounts typically resulting from revenue under long-term contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer, and right to payment is not unconditional. Contract liabilities consist of advance payments and billings in excess of revenue recognized and deferred revenue.

Retainage, included in contract assets, represents the amounts withheld from billings by our clients pursuant to provisions in the contracts and may not be paid to us until the completion of specific tasks or the completion of the project and, in some

instances, for even longer periods. Retainage may also be subject to restrictive conditions such as performance guarantees. Our retainage excludes amounts withheld by the U.S. government on certain contracts. See Notes 10 and 16 to our condensed consolidated financial statements for our discussion on U.S. government receivables.

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

Acquisition and integration related costs

Acquisition and integration related costs consist of third party transaction expenses representing legal, consulting and investment banking-related costs that are direct, incremental costs incurred prior to the closing of an acquisition and costs incurred to integrate the operations of newly acquired businesses into the Company's existing infrastructure as well as other initiatives to combine the newly merged companies into new infrastructure.

Note 3. Business Segment Information

We are organized into three core business segments and two non-core business segments. Our three core business segments focus on our core strengths in technical services relating to government services, technology, and hydrocarbons services. Our two non-core business segments are our Non-strategic Business segment, which includes businesses we intend to exit upon completion of existing contracts because they are no longer a part of our future strategic focus, and "Other," which includes our corporate expenses and general and administrative expenses not allocated to the other business segments. Our business segments are described below:

Government Services. Our GS business segment provides full life-cycle support solutions to defense, space, aviation and other programs and missions for military and other government agencies in the U.S., U.K. and Australia. As program management integrator, KBR covers the full spectrum of defense, space, aviation and other government programs and missions from research and development; through systems engineering, test and evaluation, systems integration and program management; to operations support, maintenance and field logistics. Our recent acquisitions, as described in Note 5 to our condensed consolidated financial statements, have been combined with our existing U.S. operations within this business segment and operate under the single "KBRwyle" brand.

Technology. Our Technology business segment combines KBR's proprietary technologies, equipment and catalyst supply and associated knowledge-based services into a global business for refining, petrochemicals, inorganic and specialty chemicals as well as gasification, syngas, ammonia, nitric acid and fertilizers. From early planning through scope definition, advanced technologies and project lifecycle support, KBR's Technology segment works closely with customers to provide the optimal approach to maximize their return on investment.

Hydrocarbons Services. Our HS business segment provides comprehensive project and program delivery capability globally. Our key capabilities leverage our operational and technical excellence as a global provider of EPC for onshore oil and gas; LNG/GTL; oil refining; petrochemicals; chemicals; fertilizers; offshore oil and gas (shallow-water, deep-water and subsea); floating solutions (FPUs, FPSO, FLNG & FSRU); maintenance services (via the “Brown & Root Industrial Services” brand); and consulting services provided under our three specialist consulting brands, Granherne, Energo and GVA.

Non-strategic Business. Our Non-strategic Business segment represents the operations or activities that we intend to exit upon completion of existing contracts. All Non-Strategic Business projects are substantially complete. We continue to finalize project close-out activities and negotiate the settlement of claims and various other matters associated with these projects.

Other. Our Other business segment includes corporate expenses and general and administrative expenses not allocated to the business segments above and would include any future activities that do not individually meet the criteria for segment presentation.

The following table presents revenues, gross profit (loss), equity in earnings of unconsolidated affiliates, and operating income (loss) by reporting segment. The prior year balances have been recast to reflect the change in segments as described in Note 1 to our condensed consolidated financial statements.

Operations by Reportable Segment



	Three Months Ended
	March 31,
Dollars in millions	2018			2017
Revenues:
Government Services	$	677		$	515
Technology	62			66
Hydrocarbons Services	299			499
Subtotal	1,038			1,080
Non-strategic Business	—			26
Total revenues	$	1,038		$	1,106
Gross profit (loss):
Government Services	$	52		$	37
Technology	16			14
Hydrocarbons Services	15			33
Subtotal	83			84
Non-strategic Business	(2		)	(2		)
Total gross profit (loss)	$	81		$	82
Equity in earnings of unconsolidated affiliates:
Government Services	$	8		$	9
Technology	—			—
Hydrocarbons Services	15			—
Subtotal	23			9
Non-strategic Business	—			—
Total equity in earnings of unconsolidated affiliates	$	23		$	9
Segment operating income (loss):
Government Services	$	172		$	40
Technology	15			13
Hydrocarbons Services	23			32
Other	(27		)	(20		)
Subtotal	183			65
Non-strategic Business	(2		)	(2		)
Total segment operating income (loss)	$	181		$	63

Changes in Project-related Estimates

There are many factors that may affect the accuracy of our cost estimates and ultimately our future profitability. These include, but are not limited to, the availability and costs of resources (such as labor, materials and equipment), productivity and weather, and for unit rate and construction service contracts, the availability and detail of customer supplied engineering drawings. With a portfolio of more than one thousand contracts, we sometimes realize both lower and higher than expected margins on projects in any given period. We recognize revisions of revenues and costs in the period in which the revisions are known. This may result in the recognition of costs before the recognition of related revenue recovery, if any.

Changes in project-related estimates by business segment which significantly impacted operating income were as follows:

Hydrocarbons Services

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

During 2016, we experienced weather delays as well as construction productivity rates less than previously expected on a downstream EPC project in the U.S. These issues delayed estimated completion of the project until 2018, which resulted in additional estimated costs to complete and recognition of liquidated damages which caused this project to become a loss project in the fourth quarter of 2016. There were no significant changes in estimated losses on this project during the three months ended March 31, 2018 or 2017. Included in the reserve for estimated losses on uncompleted contracts is $5 million and $9 million as of March 31, 2018 and December 31, 2017, respectively, related to this project. The EPC project was 94% complete as of March 31, 2018. Our estimated loss at completion represents our best estimate based on current information. Actual results could differ from the estimates we have used to account for this project as of March 31, 2018.

Note 4. Revenue

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

Revenue by Service/Product line was as follows:



	Three Months Ended
	March 31,
Dollars in millions	2018
By Service / Product Types
Government Services
Science and Space	$	78
Engineering	252
Logistics	347
Total Government Services	677

Hydrocarbons
Technology	62

Hydrocarbons Services
Onshore	238
Offshore	24
Industrial Services	23
Consulting	14
Total Hydrocarbons Services	299

Total Hydrocarbons	361

Total net revenue	$	1,038

Government Services revenue earned from key U.S. Government customers including U.S. DoD agencies and NASA was $492 million for the three months ended March 31, 2018. Government Services revenue earned from non-U.S. Government customers including the U.K. MoD, the Australian Defence Force and others was $185 million for the three months ended March 31, 2018.

Revenue by geographic destination was as follows:



	Three Months Ended March 31, 2018
			Hydrocarbons
Total by Countries/Regions ^(a) Dollars in millions	Government Services		Technology		Hydrocarbons Services		Total
United States	$	314	$	6	$	126	$	446
Middle East	165		7		30		202
Europe	156		8		46		210
Australia	13		1		72		86
Canada	—		2		11		13
Africa	18		7		2		27
China	—		21		—		21
Other countries	11		10		12		33
Total net revenue	$	677	$	62	$	299	$	1,038

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

Many of our contracts contain both fixed price and cost reimbursable components. We define contract type based on the component that represents the majority of the contract. Revenue by contract type was as follows:



	Three Months Ended March 31, 2018
			Hydrocarbons
Dollars in millions	Government Services		Technology		Hydrocarbons Services		Total
Fixed Price	$	218	$	59	$	56	$	333
Cost Reimbursable	459		3		243		705
Total net revenue	$	677	$	62	$	299	$	1,038

Note 5. Acquisitions, Dispositions and Other Transactions

Sigma Bravo Pty Ltd Acquisition

During the fourth quarter of 2017, we acquired 100% of the outstanding common shares of Sigma Bravo Pty Ltd ("Sigma Bravo"). Sigma Bravo provides information management, technical support and training services as well as operational support to the Australian Defence Force.

The aggregate purchase price of the acquisition was $9 million. We recognized goodwill of $1 million arising from the acquisition, which relates primarily to customer relationships and future growth opportunities to expand services provided to the Australian Defence Force. None of the goodwill is deductible for income tax purposes. The final settlement of the working capital adjustment is expected in the second quarter of 2018. Accordingly, adjustments to the initial purchase accounting for the acquired net assets will likely be completed during the second quarter of 2018. This acquisition is reported within our Government Services business segment.

Consolidation of Aspire Defence Subcontracting Joint Ventures

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

Subsequent Event

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

We will account for this transaction using the acquisition method under ASC 805, Business Combinations. Due to the limited time since the acquisition date, we have not completed the initial accounting for the acquisition.

Note 6. Cash and Equivalents

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

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



	March 31, 2018
Dollars in millions	International (a)		Domestic (b)		Total
Operating cash and equivalents	$	87	$	77	$	164
Short-term investments (c)	15		35		50
Cash and equivalents held in consolidated joint ventures	270		2		272
Total	$	372	$	114	$	486



	December 31, 2017
Dollars in millions	International (a)		Domestic (b)		Total
Operating cash and equivalents	$	112	$	124	$	236
Short-term investments (c)	82		60		142
Cash and equivalents held in consolidated joint ventures	59		2		61
Total	$	253	$	186	$	439


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


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


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

Note 7. Accounts Receivable

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



	March 31, 2018
Dollars in millions	Unbilled		Trade & Other		Total
Government Services	$	194	$	321	$	515
Technology	—		34		34
Hydrocarbons Services	69		188