The following frequently used abbreviations or acronyms are used in this Annual Report on Form 10-K as defined below:
This Annual Report on Form 10-K contains certain statements that are, or may be deemed to be, "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Some of the statements contained in this Annual Report on Form 10-K 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.
Many of these factors are beyond our ability to control or predict. Any of these factors, as well as the risks and uncertainties disclosed under “Item 1A. Risk Factors” contained in Part I of this Annual Report on Form 10-K, and the risk factors and other cautionary statements contained in our other filings with the SEC, 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 except as required by law we undertake no obligation to publicly update or revise any forward-looking statement.
Item 1. Business
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◦ | Services, Consulting and Operations and Maintenance: KBR is a leading provider of complex program management, engineering services, front-end consulting and feasibility studies, small cap and sustaining capital construction programs, turnarounds, maintenance services and more, serving the upstream (e.g., energy exploration and production), midstream (e.g., energy processing and transportation), and downstream (e.g., specialty chemical and refining) sectors. We generally deliver these multi-year services under cost reimbursable or time and materials contracts globally through KBR’s wholly-owned entities as well as our 50% interest in Brown & Root Industrial Services in North America and various other international joint ventures.
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◦ | Delivery Solutions: From conceptual design, through front end engineering and execution planning, to full EPC/EPCM for the development, construction and commissioning of projects, KBR’s delivery solutions span the hydrocarbons value chain. We have been involved in the design and construction of approximately one-third of the world’s LNG capacity.
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Competitive Advantages
We operate in global markets with customers who demand added value, know-how, technologyinnovation, technical and delivery solutions,domain expertise and wedigitally-enabled, technology-led solutions. We seek to differentiate ourselves in areas in which we believe we have a competitive advantage, including:
Health, Safety, Security & Environment•People
◦Distinctive, mission-focused and Sustainability
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◦ | Safe and responsible operations are essential, and our Zero Harm culture prioritizes the safety and security of our people as well as the active management of our environmental impact. |
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◦ | As an industry leader, we have and will continue to invest in the development of disruptive, innovative clean energy solutions that promote a sustainable world. |
inclusive team ethos and culture, which we refer to as “One KBR”.
◦Deep domain expertise resident across nationally recognized subject matter experts.
◦Highly-cleared employee base.
•Sustainability
◦Achieved carbon neutrality from 2019 and established a 2030 net-zero carbon ambition.
◦As an industry leader, we have and will continue to invest in the development of disruptive, innovative clean energy solutions that promote a cleaner, greener future and a sustainable world.
◦World leader in ammonia technology, a leading hydrogen energy enabler, with a fully developed, proprietary, end-to-end green ammonia solution K-GreeNTM.
◦Exclusive licensor of Cat-HTRTM, an innovative, disruptive mixed plastics recycling technology that processes all types of plastic including many that are currently considered unrecyclable, and Hydro-PRTTM, a cutting-edge, scalable technology that utilizes supercritical steam to convert a wide range of single-use and other plastics into virgin-grade feedstocks used to produce new plastics, delivering a truly circular economy.
◦Safe and responsible operations are essential, and our Zero Harm culture prioritizes the safety and security of our people as well as the active management of our environmental impact.
•Technical Excellence and Digital Solutions
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◦ | Quality, world-class technology, know-how and solutions. |
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◦ | Designing and implementing innovative digital solutions to diagnose and solve complex problems, including applying machine learning and artificial intelligence to predictive maintenance. |
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◦ | Creating virtual and augmented reality visualizations to provide greater perspectives and insights in a controlled environment. |
People
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◦ | Distinctive, competitive and customer-focused culture, through our people ('One KBR'). |
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◦ | Deep domain expertise resident in nationally recognized subject matter experts, many with U.S. government security clearance. |
◦Innovative, sustainable, proprietary process technology, expertise and solutions.
◦Innovative digital solutions and advanced capabilities to improve operations, reliability and environmental impact, including machine learning and artificial intelligence.
◦Virtual and augmented reality visualizations to provide greater perspectives, insights and training in a controlled environment.
•Customer Relationships
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◦ | Customer objectives are placed at the center of our planning and delivery. |
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◦ | Decades of enduring relationships across our government services clients and with major oil and gas and industrial customers such as BP p.l.c., Chevron Corporation and Shell Corporation. |
Project Delivery
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◦ | A reputation for disciplined and successful delivery of large, complex and difficult projects globally - using world-class processes (the 'KBR Way'), including program management. |
◦Customer missions and objectives are placed at the center of our planning and delivery model.
Full Life-cycle Asset Support
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◦ | Comprehensive asset services through long-term contracts. |
◦Decades of enduring relationships with government and commercial client base.
•Financial Strength
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◦ | Diverse portfolio of multi-year, mission critical programs creating stability and resilience. |
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◦ | Low capital intensive business model generating favorable operating cash flows. |
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◦ | Strong liquidity with ample capacity for growth. |
◦Diverse portfolio of multi-year, mission critical programs creating stability and resilience.
◦Low capital intensity business model generating favorable operating cash flows.
◦Strong liquidity with ample capacity for growth.
Our Business Segments
We provide a wide range of professional services and the management of our business is heavily focused on major projects or programs within each of our reportable segments. At any given time, government programs and joint ventures represent a substantial part of our operations. Our business is organized into threetwo core business segments and twoone non-core business segmentssegment as follows:
Core business segments
•Government Solutions ("GS")
•Sustainable Technology Solutions ("STS")
Energy Solutions
Non-core business segmentssegment
•Other
Non-strategic Business
Our business segments are described below.
Government Sector
Government Solutions. Our GSGovernment Solutions business segment provides full life-cycle support solutions to defense, intelligence, space, aviation and other programs and missions for military and other government agencies primarily in the U.S., U.K. and Australia. KBR coversKBR's services cover the full spectrum; fromspectrum spanning research and development, throughadvanced prototyping, acquisition support, systems engineering, C4ISR, cyber analytics, space domain awareness, test and evaluation, systems integration and program management, toglobal supply chain management and operations support, maintenancereadiness and field logistics. Our acquisitions have been integrated with our existing operations as describedsupport. With the acquisition of Frazer-Nash Consultancy Limited ("Frazer-Nash") on October 20, 2021 (described in Note 4 to ourthe consolidated financial statements.
Hydrocarbons Sector
Technology Solutions. Our TSstatements), our GS business segment combines KBR'salso provides a broad range of professional advisory services to deliver high-end systems engineering, systems assurance and technology to customers across the defense, energy and critical infrastructure sectors primarily in the U.K. and Australia.
Sustainable Technology Solutions. Our Sustainable Technology Solutions business segment is anchored by our portfolio of over 70 innovative, proprietary, sustainability-focused process technologies equipmentthat we license spanning four primary areas: ammonia/syngas/fertilizers, chemical/petrochemicals, clean refining and catalyst supply, digital solutionscircular process/circular economy solutions. STS also includes our highly synergistic advisory and associated knowledge-basedconsulting practice focused on energy transition and net-zero carbon emission consulting, our high-end engineering, design and professional services into a global business for refining, petrochemicals, inorganic and specialty chemicalsofferings, as well as gasification, syngas, ammonia, nitric acidour technology-led industrial solutions built on our KBR INSITE® platform. KBR INSITE® is a proprietary, digital, cloud-based operations and fertilizers. Our TS business segment has led the waymaintenance platform that identifies opportunities for our clients to achieve sustainable improvements in the development of advanced digitalproduction, reliability, environment impact, energy efficiency and proprietary tools and floating systems solutions.ultimately profitability. From early planning through scope definition, advanced technologies and projectfacility life-cycle support, our TSSTS business segment works closely with customers to provide what we believe is the optimal approach to maximize their return on investment.
Energy Solutions.Other. Our ES business segment provides full life-cycle support solutions across the upstream, midstream and downstream hydrocarbons markets. We provide comprehensive project and program delivery capabilities as well as engineering services, front-end consulting and feasibility studies, sustaining capital construction, turnarounds, maintenance services and more. Our key capabilities leverage our operational and technical excellence as a global provider of EPC and high-impact consulting and engineering services for onshore oil and gas; LNG/GTL; oil refining; petrochemicals; chemicals; fertilizers; offshore oil and gas; and floating solutions.
Other
Non-strategic Business. Our Non-strategic Business segment represents the operations or activities we determine are no longer core to our business strategy and that we have exited or intend to exit upon completion of existing contracts. As of December 31, 2019, all Non-Strategic Business projects are substantially complete. Current activities in this business segment primarily relate to final project close-out, negotiation and settlement of claims, joint venture liquidation and various other matters associated with these projects.
Other. Ournon-core Other segment includes corporate expenses and selling, general and administrative expenses not allocated to the core business segments above.
Significant Customers
We provide services to a diverse customer base, including domestic and foreign governments and commercial companies.
We generate significant revenues within our GS business segment from key U.S. government customers including U.S. DoD and NASA, and from the U.K government. No other customers represented 10% or more of consolidated revenues in any of the periods presented. The marketsfollowing table summarizes our revenues from U.S. and U.K. government agencies.
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Revenues and percent of consolidated revenues attributable to major customers by year: |
| Years ended December 31, |
Dollars in millions, except percentage amounts | 2021 | | 2020 | | 2019 |
U.S. government (all agencies) | $ | 5,122 | | | 70 | % | | $ | 3,079 | | | 53 | % | | $ | 3,014 | | | 53 | % |
U.K. government (all agencies) | $ | 508 | | | 7 | % | | $ | 573 | | | 10 | % | | $ | 659 | | | 12 | % |
Information relating to our customer concentration is described in “Item 1A. Risk Factors” contained in Part I of this Annual Report on Form 10-K. Also, see further explanations in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" contained in Part II of this Annual Report on Form 10-K and Note 3 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
Recent Developments
Frazer-Nash Acquisition
On October 20, 2021, we serve are highly competitiveacquired Frazer-Nash, a leading provider of high-end systems engineering, assurance and technology advisory services used to solve complex challenges. Frazer-Nash provides a broad range of professional advisory services across the defense, renewable energy and critical infrastructure sectors primarily in the U.K. and Australia. With expertise in areas such as systems engineering, data science, cyber and clean energy, Frazer-Nash compliments KBR's global priorities with minimal overlap because of its geographic footprint. Additional information relating to the Frazer-Nash acquisition is described in Part II of this Annual Report on Form 10-K in Note 4 to our consolidated financial statements.
HomeSafe Alliance LLC Contract Award
In November 2021, we announced that HomeSafe Alliance LLC (“HomeSafe”), a KBR led joint venture, was awarded the global household goods contract by U.S. Transportation Command. The contract ceiling value is $20 billion with a potential 9-year term, inclusive of all options periods. HomeSafe is expected to be the exclusive household goods move management service provider for the most part require substantial resourcesU.S. Armed Forces, Department of Defense civilians and highly skilledtheir families. Under this contract, HomeSafe plans to modernize and experienced technical personnel. A large number of companies are competing ininfuse technology to improve the markets served by our business, including U.S.-based companies such as CACI International, Inc., EMCOR Group, Inc., Fluor Corporation, Leidos Holdings, Inc., ManTech International Corporation, AECOM, Quanta Services Inc., Science Applications International Corporation ("SAIC"), Booz Allen Hamiltondomestic and international-based companies such as Bechtel, Jacobs Engineering, Chiyoda Corporation ("Chiyoda"), TechnipFMC, Worley-Parsonsinternational relocation experience for all military personnel and Vectrus, Inc. Because the markets for our services are vast and extend across multiple geographic regions, we cannot make a definitive estimate of the total number of our competitors.their families. The contract award is currently under protest.
Significant Joint Ventures and Alliances
We enter into joint ventures and alliances with other reputable industry participants to capitalize on the strengths of each party and provide greater flexibility in delivering our services based on expertise, cost and geographical efficiency, increase the number of opportunities that can be pursued and reduce exposure and diversify risk. Clients of our ES business segment frequently require EPC contractors to work in teams given the size, cost and complexity of global projects. Our significant joint ventures and alliances are described below. All joint venture ownership percentages presented are stated as of December 31, 2019.2021.
Aspire Defence isLimited, a joint venture currently owned by KBR and two financial investors, to upgrade and provideprovides a range of facilities life cycle management services toat the British Army’s garrisons at Aldershot and aroundacross the Salisbury Plain in the U.K. We own aKBR owns 45% interest inof Aspire Defence Limited that is accounted forreported within our GS business segment using the equity method of accounting. Prior to January 15, 2018, we held a 50% interest in the joint ventures that provide the construction and related support services to Aspire Defence, with the other 50% being owned by Carillion. On January 15, 2018, Carillion entered into compulsory liquidation and was excluded from future business and benefit from its interest in the joint ventures. As a result, KBR assumed operational management and control of these entities. KBR began consolidating the financial results of these entities in its financial statements effective January 15, 2018. On April 18, 2018, we completed the acquisition of Carillion's interests in the subcontracting entities as further discussed in Note 4 to our consolidated financial statements.
In 2016, we established the Affinity joint venture with Elbit Systems Ltd. to procure, operate and maintain aircraft and aircraft-related assets over an 18-year contract period, in support of the UKMFTS project. KBR owns a 50% interest in Affinity.In addition, KBR owns a 50% interest in the two joint ventures, Affinity Capital Works and Affinity Flying Services, which provide procurement, operations and management support services under subcontracts with Affinity. The investments are accounted for within our GS business segment using the equity method of accounting.
Brown & Root Industrial Services is a joint venture with Bernhard Capital Partners and offers maintenance services, turnarounds and small capital projects, primarily in North America. WeAmerica, in which we own a 50% interest in this joint venture and accountequity interest. The investment is accounted for this investment within our ESSTS business segment using the equity method of accounting.
JKC Australia LNG is a joint venture contracted to perform the engineering, procurement, supply, construction and commissioning of onshore LNG facilities for a client in Darwin, Australia. The project is being executed through two entities (collectively, "JKC"), which are VIEs, in which we own a 30% equity interest. The investment is accounted for within our STS business segment using the equity method of accounting.
Backlog of Unfulfilled Orders
Backlog is our estimate of the U.S. dollar amount of future revenues we expect to realize as a result of performing work on awarded contracts. For projects within our unconsolidated joint ventures, we have included our percentage ownership of the joint venture’s estimated revenues in backlog to provide an indication of future work to be performed. The future revenues we expect to realize as a result of backlog was $14.6$15.0 billion and $13.5$15.1 billion as of December 31, 20192021 and 2018,2020, respectively, with approximately 18%17% and 22%16%, respectively, related to work being executed by joint ventures accounted for using the equity method of accounting. We estimate that, as of December 31, 2019, 31%2021, 30% of our backlog will be recognized as revenues or equity in earnings of unconsolidated affiliates within fiscal 2020.year 2022. For additional information regarding backlog, see our discussion within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II of this Annual Report on Form 10-K.
Government Contracts and Regulations
Our contracts broadly consist of fixed-price, cost-reimbursable or a combination ofbusiness is heavily regulated. We contract with numerous U.S. government agencies and entities, principally the two. Our fixed-price contracts may include cost escalationU.S. DoD and NASA. When working with these and other features that allow for increases in price should certain events occur or conditions change. Fixed-price contracts are typically subject to change orders if the scope of work changes or unforeseen conditions arise resulting in adjustmentsU.S. government agencies and entities, we must comply with various laws and regulations relating to the fixed price.
Fixed-price contracts include both lump-sumformation, administration and unit-rateperformance of contracts. Under lump-sum contracts, we perform a defined scope of work for a specified fee to cover all costs and any profit element. Lump-sum contracts entail significant risk to us because they require us to predetermine the work to be performed, the project execution schedule and all the costs associated with the scope of work. Unit-rate contracts are essentially fixed-price contracts with the only variable being units of work to be performed. Although fixed-price contracts involve greater risk than cost-reimbursable contracts, they also are potentially more profitable because the owner/customer pays a premium to transfer project risks to us.
Cost-reimbursable contracts include cost-plus fixed fee, cost-plus fixed rate, and time and materials contracts. Under cost-reimbursable contracts, the price is generally variable based upon our actual costs incurred for materials, equipment, reimbursable labor hours and in some cases, overhead and general and administrative expenses. Profit on cost-reimbursable contracts may be in the form of a fixed fee or a mark-up applied to costs incurred, or a combination of the two. The fee may also be an incentive fee based on performance indicators, milestones or targets. Cost-reimbursable contracts may also provide for a guaranteed maximum price where the total fee plus the total cost cannot exceed an agreed upon guaranteed maximum price. Cost overruns or costs associated with project delays could be our responsibility under such contracts. Cost-reimbursableU.S. government contracts are generally less risky than fixed-price contracts becausesubject to the owner/customer retainsFAR, which sets forth policies, procedures and requirements for the acquisition of goods and services by the U.S. government, other agency-specific regulations that implement or supplement the FAR, such as the DoD FAR Supplement ("DFARS"), and other applicable laws and regulations. These regulations impose a broad range of requirements, many of which are unique to government contracting, including various procurement, import and export, security, contract pricing and cost, contract termination and adjustment and audit requirements. Among other things, these laws and regulations:
•require certification and disclosure of all cost and pricing data in connection with certain contract negotiations;
•define allowable and unallowable costs and otherwise govern our right to reimbursement under various cost-type U.S. government contracts;
•require compliance with CAS;
•require reviews by the project risks.DCAA, DCMA and other regulatory agencies for compliance with a contractor’s business systems;
•restrict the use and dissemination of and require the protection of unclassified contract-related information and information classified for national security purposes and the export of certain products and technical data; and
•prohibit competing for work if an actual or potential organizational conflict of interest, as defined by these laws and regulations, related to such work exists and/or cannot be appropriately mitigated, neutralized or avoided.
Our GS business segment primarily performs work under cost-reimbursable contracts in the U.S. with the DoD and other U.S. governmental agencies that are generally subject to applicable statutes and regulations.agencies. If the U.S. government concludes costs charged to a contract are not reimbursable under the terms of the contract or applicable procurement regulations, these costs are disallowed or, if already reimbursed, we may be required to refund the reimbursed amounts to the customer. Such conditions may also include interest and other financial penalties. If performance issues arise under any of our government contracts, the customer retains the right to pursue remedies, which could include termination under any affected contract. Generally, our customers have the contractual right to terminate or reduce the amount of work under our contracts at any time. For more information, see “Item 1A. Risk Factors” contained in Part I of this Annual Report on Form 10-K.
Our GS business segment also participates in PFI contracts, such as the Aspire Defence and UKMFTS projects. PFIs are long-term contracts that outsource the responsibility for the construction, procurement, financing, operation and maintenance of government-owned assets to the private sector. These contracts may contain both fixed-price and cost-reimbursable elements. The PFI projects in which KBR participates are all located in the U.K. with contractual terms ranging from 15 to 35 years, and involve the provision of services to various types of assets ranging from acquisition and maintenance of major military equipment and housing to transportation infrastructure. Under most of these PFI contracts, the primary deliverables of the contracting entity are the initial construction or procurement of assets for the customer and the subsequent provision of operations and maintenancelifecycle management services related tofor the assets once they are transferred and ready for their intended use.life of such assets. The amount of renumeration from the customer to the contracting entity is negotiated on each contract and varies depending on the specific terms for each PFI.
Significant CustomersContract Types
WeThe Company performs work under contracts that broadly consist of fixed-price, cost-reimbursable, time-and-materials or a combination of the three.
Fixed-price contracts include both lump-sum and unit-rate contracts. Under lump-sum contracts, we perform a defined scope of work for a specified fee to cover all costs and any profit element. Lump-sum contracts entail significant risk to us because they require us to predetermine the work to be performed, the project execution schedule and all the costs associated with the scope of work. Unit-rate contracts are essentially fixed-price contracts with the only variable being units of work to be performed. Further, our fixed-price contracts may include cost escalation and other features that allow for increases in price should certain events occur or conditions change. Fixed-price contracts are typically subject to change orders if the scope of work changes or unforeseen conditions arise resulting in adjustments to the fixed price. Although fixed-price contracts involve greater risk than cost-reimbursable contracts, they also are potentially more profitable because the owner/customer pays a premium to transfer project risks to us.
Time-and-materials contracts typically provide services tofor negotiated fixed hourly rates for specified categories of direct labor. The rates cover the cost of direct labor, indirect expense and fee. These contracts can also allow for reimbursement of cost of
material plus a diverse customer base, including:
domestic and foreign governments;
international oil companies and national oil companies;
independent refiners;
petrochemical and fertilizer producers;
developers; and
manufacturers.
Within the past three years, we generated significant revenues within our GS business segment from keyfee, if applicable. In U.S. government customers including U.S. DoD and NASA, and from the U.K government. No other customers represented 10% or morecontracting, this type of consolidated revenues in anycontract is generally used when there is uncertainty of the periods presented.extent or duration of the work to be performed by the contractor at the time of contract award or it is not possible to anticipate costs with any reasonable degree of confidence. With respect to time-and-materials contracts, we assume the price risk because our costs of performance may exceed negotiated hourly rates. In commercial and non-U.S. government contracting, this contract is generally used for defined and non-defined scope contracts where there is a higher degree of uncertainty and risks as to the scope of work. These types of contracts may also provide for a guaranteed maximum price where the total cost plus the fee cannot exceed an agreed upon guaranteed maximum price or not-to-exceed provisions.
Under cost-reimbursable contracts, the price is generally variable based upon our actual allowable costs incurred for materials, equipment, reimbursable labor hours, overhead and G&A expenses. Profit on cost-reimbursable contracts may be in the form of a fixed fee or a mark-up applied to costs incurred, or a combination of the two. The following table summarizesfee may also be an incentive fee based on performance indicators, milestones or targets and can be based on customer discretion or in the form of an award fee determined based on customer evaluation of the Company's performance against contractual criteria. Cost-reimbursable contracts may also provide for a guaranteed maximum price where the total fee plus the total cost cannot exceed an agreed upon guaranteed maximum price. Cost-reimbursable contracts are generally less risky because the owner/customer retains many of the project risks, however it generally requires us to use our revenues frombest efforts to accomplish the scope of the work within a specified time and budget. Cost-reimbursable contracts with the U.S. government are generally subject to the FAR and U.K.are competitively priced based on estimated or actual costs of providing the contractual goods or services. The FAR provides guidance on types of costs that are allowable in establishing prices for goods and services provided to the U.S. government and its agencies. Pricing for non-U.S. government agencies and commercial customers is based on specific negotiations with each customer.
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Revenues and percent of consolidated revenues attributable to major customers by year: |
| Years ended December 31, |
Dollars in millions, except percentage amounts | 2019 | | 2018 | | 2017 |
U.S. government (all agencies) | $ | 3,014 |
| | 53 | % | | $ | 2,610 |
| | 53 | % | | $ | 1,914 |
| | 46 | % |
U.K. government (all agencies) | $ | 659 |
| | 12 | % | | $ | 622 |
| | 13 | % | | $ | 66 |
| | 2 | % |
Information relating to our customer concentration is described in “Item 1A. Risk Factors” contained in Part I of this Annual Report on Form 10-K. Also, see further explanations in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" contained in Part II of this Annual Report on Form 10-K.
Raw Materials and Suppliers
Equipment and materials essential to our business are obtained from a variety of global sources. The principal equipment and materials we use in our business are subject to availability and price fluctuations due to customer demand, producer capacity and market conditions. We monitor the availability and price of equipment and materials on a regular basis. Our procurement function seeks to leverage our size and buying power to ensure that we have access to key equipment and materials at low prices and ideal delivery schedules. While the ongoing COVID-19 pandemic has resulted in significant supply chain disruptions globally and within the United States, we have not experienced, and do not currently foreseeanticipate experiencing, any significant lackprocurement difficulties, as we purchase our required materials and equipment from a variety of availabilitysources. However, a number of equipmentfactors that we may not be able to predict or control could result in increased costs for these materials, including the continued impact of the ongoing COVID-19 pandemic, as well as global trade relationships and materials in the near term, the availability of these items may vary significantly from year to yearother general market and any prolonged unavailability or significant price increases for equipment and materials necessary to our projects and services could have a material adverse effect on our business.political conditions. See “Item 1A. Risk Factors” contained in Part I of this Annual Report on Form 10-K for more information.
Intellectual Property
The use of intellectual property generally benefits our TS and ESSTS business segments.segment. We have developed, acquired or otherwise have the right to license leading technologies, including technologies held under license from third parties, used for the production of a variety of petrochemicals and chemicals and in the areas of olefins, refining, fertilizers, coal gasification, semi-submersibles and specialty chemicals. We also license a variety of technologies for the transformation of raw materials into commodity chemicals such as phenol which is used in the production of consumer end products. In addition, we are a licensor of ammonia process technologies used in the conversion of natural gas to ammonia.ammonia with a fully developed, proprietary, end-to-end green ammonia solution K-GreeNTM. We are the exclusive licensor of Hydro-PRTTM, a cutting-edge, scalable technology that utilizes supercritical steam to convert a wide range of single-use and other plastics into commercial raw materials used to produce new plastics. We also offer technologies for crystallization and evaporation, as well as concentration and purification of strong inorganic acids. We believe our technology portfolio and experience in the commercial application of these technologies and our related know-how differentiates us, enables our sustainability strategy and enhances our margins and encourages customers to utilize our broad range of EPC and construction services.margins.
Our rights to make use of technologies licensed to us are governed by written agreements of varying durations, including some with fixed terms that are subject to renewal based on mutual agreement. Generally, each agreement may be further extended and we have historically been able to renew existing agreements before they expire. We expect these and other similar agreements to be extended so long as it is mutually advantageous to both parties at the time of renewal. For technologies we own, we protect our rights, know-how and trade secrets through patents and confidentiality agreements.
Seasonality
Our operations are not generally affected by seasonality. However, various factors can affect the distribution of our sales between accounting periods, including the timing of government awards, the availability of government funding, product deliveries and customer acceptance. Additionally, weather and natural phenomena can temporarily affect the performance of our services.
Employees
As of December 31, 2019, we had approximately 28,000 employees worldwide, of which approximately 6% were subject to collective bargaining agreements. In addition, our joint ventures employ approximately 10,000 employees. Based upon the geographic diversification of our employees, we believe any risk of loss from employee strikes or other collective actions would not be material to the conduct of our operations taken as a whole.
Worker Health and Safety
We are subject to numerous worker health and safety laws and regulations. In the U.S., these laws and regulations include the Federal Occupational Safety and Health Act and comparable state legislation, the Mine Safety and Health Administration laws, and safety requirements of the Departments of State, Defense, Energy and Transportation of the U.S. government. We are also subject to similar requirements in other countries in which we have extensive operations, including the U.K. where we are subject to the various regulations enacted by the Health and Safety Act of 1974.
These laws and regulations are frequently changing and it is impossible to predict the effect of such laws and regulations on us in the future. Our global Zero Harm initiative reinforces health, safety, security and environment as key components of the KBR culture and lifestyle. This initiative incorporates three dynamic components: "Zero Harm," "24/7" and "Courage to Care," which empower individuals to take responsibility for their health and safety, as well as that of their colleagues. However, we cannot guarantee that our efforts will always be successful and from time to time we may experience accidents or unsafe work conditions may arise. Our project sites often put our employees and others in close proximity with mechanized equipment, moving vehicles, chemical and manufacturing processes, and highly regulated materials. Additionally, our employees and others at certain project sites may be exposed to severe weather events or high security risks. We actively seek to maintain a safe, healthy and environmentally sound work place for all of our employees and those who work with us. Consequently, we may incur substantial costs to maintain the safety and security of our personnel in these locations.
Environmental Regulation
Our business involves planning, design, program management, construction and construction management and operations and maintenance at various project sites throughout the world, including oil field and related energy infrastructure construction services, in and around sensitive environmental areas, such as rivers, lakes and wetlands. Our operations may require us to manage, handle, remove, treat, transport and dispose of toxic or hazardous substances, which are subject to stringent and complex laws relating to the protection of the environment and prevention of pollution.
Significant fines, penalties and other sanctions may be imposed for non-compliance with environmental and worker health and safety laws and regulations, and some laws provide for joint and several strict liabilities for remediation of releases of hazardous substances, rendering a person liable for environmental damage, without regard to negligence or fault on the part of such person. These laws and regulations may expose us to liability arising out of the conduct of operations or conditions caused by others, or for our acts that were in compliance with all applicable laws at the time these acts were performed. For example, there are a number of governmental laws that strictly regulate the handling, removal, treatment, transportation and disposal of toxic and hazardous substances, such as the Comprehensive Environmental Response Compensation and Liability Act of 1980, and comparable national and state laws that impose strict, joint and several liabilities for the entire cost of cleanup, without regard to whether a company knew of or caused the release of hazardous substances. In addition, some environmental regulations can impose liability for the entire clean-up on owners, operators, transporters and other persons arranging for the treatment or disposal of such hazardous substances costs related to contaminated facilities or project sites. Other environmental laws applicable to our and customers' operations affecting us include, but are not limited to, the Resource Conservation and Recovery Act, the National Environmental Policy Act, the Clean Air Act, the Clean Water Act, the Occupational Safety and Health Act and the Toxic Substances Control Act as well as other comparable foreign and state laws. Liabilities related to environmental contamination or human exposure to hazardous substances comparable foreign and state laws or a failure to comply with any applicable environmental and worker health and safety laws regulations could result in substantial costs to us, including cleanup costs, fines, civil or criminal sanctions, third-party claims for property damage, personal injury or cessation of remediation activities.
Additional information relating to environmental regulations is described in "Item 1A. Risk Factors” contained in Part I of this Annual Report on Form 10-K and in Note 1714 to our consolidated financial statements.
Human Capital Management
Across KBR, 2021 has been known as ‘the year of our people’. We entered the year with ambitious plans to build on our empowering culture, enhance our employee experience and ensure that we deserve our reputation as an employer of choice. Through the combined efforts of our employees and leadership team, this bold initiative has already resulted in tangible benefits for our people and the business, helping us realize our vision to bring together the best and brightest to deliver technology and solutions that help our customers accomplish their most critical missions and objectives.
Culture and Values
We refreshed our One KBR Values in late 2020, as follows:
•We Value Our People
•We Deliver
•We Are People of Integrity
•We Empower
•We Are a Team of Teams
We brought these to life early in 2021 by a cascade of conversations between managers and their teams in every business and market. Our aim was to lift our values off the page and into our employees’ local experience, identifying any areas for improvement and building on our existing strengths. This concerted effort was underpinned by a review of our people processes to ensure these reflect our culture and values, resulting in updates to selection and exit interviews, job descriptions and training collateral. We then tested how embedded the values are through our global ‘People Perspectives’ employee survey, achieving high scores in each value area. This positive feedback about our organizational culture is particularly encouraging as many employees continued to work remotely through the pandemic. However, we are not complacent. Leaders across KBR continue to consciously reinforce our values through their everyday behavior and to proactively engage and communicate with their teams as hybrid working arrangements become the new normal.
Employee Health & Safety
We are subject to numerous worker health and safety laws and regulations. In the U.S., these laws and regulations include the Federal Occupational Safety and Health Act and comparable state legislation, the Mine Safety and Health Administration laws and safety requirements of the Departments of State, Defense, Energy and Transportation of the U.S. government. We are also subject to similar requirements in other countries in which we have extensive operations, including the U.K. where we are subject to the various regulations enacted by the Health and Safety Act of 1974. These laws and regulations are frequently changing, and it is impossible to predict with certainty the effect of such laws and regulations on us in the future.
Our global Zero Harm culture encompasses ten sustainability pillars. The central pillar is Health Safety & Security and is supported by the key Zero Harm principle of “Courage to Care,” which we define as the willingness to intervene when one observes something that does not meet acceptable standards. We believe our Zero Harm culture has resulted in a work environment that promotes employee engagement and ownership. Although we have experienced significant improvement in our safety performance indicators, we cannot guarantee that our efforts will always be successful and from time to time we may experience incidents or unsafe work conditions or practices may arise. Our project sites often put our employees and others in proximity with mechanized equipment, moving vehicles, chemical and manufacturing processes and highly regulated materials. Additionally, our employees and others at certain project sites may be exposed to severe weather events or high security risks. We actively seek to maintain a safe, healthy and environmentally sound workplace for all of our employees and those who work with us. Consequently, we may incur substantial costs to maintain the safety and security of our personnel in these locations.
COVID-19
As the dynamic impacts of the pandemic continued to affect all businesses and markets throughout 2021, the employees of KBR have been reassured by our robust safety protocols, which are founded on our Zero Harm culture. Our people are resilient, and while personal and operational challenges have persisted, they continued to provide excellent service to our customers.
During 2021, we introduced a requirement for all people attending KBR sites to be fully vaccinated, or by exception to undertake daily testing, to safeguard the health of visitors and colleagues. Safety protocols remained in place, such as social
distancing and wearing masks, and this safe environment has enabled large numbers of employees previously working from home to return to the workplace in accordance with local pandemic guidance. In the US, we prepared early for the Executive Order for Federal Contractors, and by the end of 2021, 95% of affected employees were either vaccinated or had approved accommodations in place and underway.
Mental Health & Fitness
During 2021, our focus on employee wellbeing to enable peak performance continued, and our Mental Health & Wellbeing Committee and Employee Resource Group ("ERG"), OK NoW ("Network of Well-Being"), took significant strides implementing our wellbeing strategy. A structured communication program, global roll-out of training to over 700 managers and expansion of our Wellbeing Ambassadors program to over 9,000 employees have helped create an environment where employees can thrive and perform at their best. We also provide all employees and their families with free 24/7 access to a first-rate employee support program and a mental fitness app to help track and support their mental health and resilience. These efforts have resulted in a supportive environment as evidenced in our global survey results, where we achieved a high Wellbeing Index score.
Organization Agility
KBR continues to grow organically and through acquisition, while remaining agile and restructuring where required to support our long-term strategy. At the end of 2021, we employed approximately 28,000 people performing diverse, complex and mission critical roles in 34 countries. In addition, our unconsolidated joint ventures employ approximately 10,000 employees.
With a fundamental focus on our customers, our working practices adapt to their projects and priorities while empowering our employees to balance personal and work commitments through increasing adoption of flexible working practices. This agile working approach has also supported our Inclusion & Diversity journey, allowing us to recruit from global and diverse talent pools. Responses to our global survey demonstrated that this modern approach resonates with our employees, with a majority saying they are able to balance their work and personal lives and have the flexibility to take time off while still meeting the needs of our fast-paced, customer-focused organization.
Talent Acquisition
In 2021, we hired almost 6,000 employees, and while some markets found candidates in shorter supply, we maintained a strong applicant flow by clearly articulating our EVP, running social media campaigns highlighting KBR’s unique culture and values and showcasing the important work our employees perform across the world.
Teams of experts from across KBR reviewed our onboarding and hiring processes to ensure best practices are adopted in all business areas and we expanded our use of digital talent platforms to monitor candidate supply and demand in real time. During the year, we instituted unconscious bias training for all new recruiters and managers and undertook a concerted effort of outreach to diverse candidates, including recruitment at historically black colleges and universities and veteran hiring events. We have also begun to track the progress of diverse candidates through our HR information systems, which showed that 30% of our new hires were women and 49% were Black, Indigenous or people of color.
Inclusion & Diversity
The leadership team at KBR fundamentally believes that Inclusion & Diversity ("I&D") is good for business. It helps us innovate, helps our teams perform and creates an environment where everyone can belong. Diversity is embedded in KBR, with employees from over 120 countries. In 2021, we increased our data capture to encompass race/ethnicity in all markets, with 94% of all employee records now updated. As of December 31, 2021, our employees had the following gender and race/ethnicity demographics:
Additionally, our Board of Directors is 30% women and 30% Black, Indigenous or people of color. Our particular attention on gender increasingly shows in our demographics with the percentage of women in KBR increasing from 23.4% to 24.8% in 2020 and 2021, respectively.
Our I&D Council helps shape our strategic priorities. In 2021, it provided recommendations related to working practices, target setting, supporting racial and ethnic diversity and sustainability in the supply chain. Furthermore, it has committed to identifying best practices to create an inclusive organization for employees with disabilities, increase the number of women in operational and business leadership roles and improve retention of diverse talent.
In 2021, we required each area of the business to develop and implement a tailored I&D action plan, which was directly linked to payout under our short-term incentive program. Our 2022 plans will build on this baseline while incorporating the 2021 recommendations from the I&D Council as appropriate.
We continue to strive for increased visibility of I&D data, enabling us to better analyze our performance across all people processes, from the candidate pipeline to pay equity, and in 2022 we are extending our data capture of veteran status and sexual orientation. With enhancements to our benefits, such as the introduction of supplementary childcare/elder-care benefits and expansion of floating holidays, and persistent focus on I&D among our Team of Teams, we are confident that KBR will continue to see improvements within our gender and race/ethnicity demographics. In 2021, KBR's President and Chief Executive Officer signed the CEO Action Pledge, making a public commitment to diversity, equality and inclusion, and KBR has been recognized externally for our progress to date with our ranking in the top 100 of Forbes’ list of The World’s Top Female-Friendly Companies.
Employee Resource Groups
For many years, KBR has encouraged employees to participate in employee-led Employee Resource Groups, where networking, advocacy and education help instill an environment where everyone can contribute. In addition to OK NoW, our ERG focused on mental health and wellbeing, we have expanded our ERGs in the I&D arena with the addition of the Armed Forces Community, the globalization of our Pride & Allies ERG and plans to launch MERGE, an ERG focused on minority groups. Together with ASPIRE, our ERG focused on the promotion of gender diversity, these other I&D focused ERGs came together in the ‘All In’ community, which was launched in 2021, and held a series of high-impact events on topics ranging from neurodiversity to understanding disabilities in the workplace. Our ERGs are rounded out with IMPACT, the community for early career professionals, which also expanded globally in 2021 to host a series of fireside chats with the CEO and virtual networking events to connect colleagues across KBR. Our Team of Teams value is embedded in these ERGs, giving employees a strong voice across KBR, and providing inspiring insight for leaders and colleagues across the globe.
Talent Development & Succession
In addition to our focus on developing early career professionals, which includes established intern and graduate programs, KBR offers a suite of world-class courses for employees in management and leadership roles. Together with the extension of our formal talent review processes in 2021, they help strengthen succession planning at all levels, supplementing the Board’s continued oversight of our Chief Executive Officer and Executive Leadership Team succession planning. During the year, we also introduced a formal Front Line Leaders program, designed to support employees newly transitioning into these critical roles, and began implementing a new approach to performance management, with frequent, real-time feedback conversations replacing traditional performance reviews.
Our other area of focus was on technical talent. In 2021, we welcomed 12 distinguished technical leaders to the inaugural One KBR Technical Fellows program. This important program fosters our culture of innovation, fuels collaboration across diverse disciplines and helps us attract, mentor and inspire the next generation of talent.
Employee Engagement
In line with the labor market tightening across the globe, we saw an increase in voluntary turnover in 2021 in some countries when pent up demand from early in the pandemic was released as economies rebounded. Our agile hiring practices allowed us to keep pace with demand for talent, with applicant flow and staffing levels remaining at previous strong levels. This resilience was helped by our continued focus on our employees evidenced by the results of our People Perspectives Survey in which a majority of our employees said KBR is a great place to work. As well as many strengths, employee feedback from the survey identified opportunities to improve and we are developing plans to increase employees' engagement across KBR.
With remote working commonplace, our communications programs continued to modernize with the introduction of the KBR podcast ‘In Orbit’, the continued development of our Communities of Interest and our ‘People First’ video series in which leaders discussed how our people strategy is supporting KBR employees across the world. Our employees’ high level of engagement is deep-rooted with a majority of respondents feeling proud of what they accomplish and is a credit to their managers who scored highly in the survey’s Manager Effectiveness Index. Each business area has developed a plan to build on this positive response and address any local areas of concern as we continue to put our people at the heart of KBR.
Ethics and Compliance
We prioritize conducting our business with ethics and integrity. We are subject to numerous compliance-related laws and regulations, including the FCPA, the U.K. Bribery Act, other applicable anti-bribery legislation and laws and regulations regarding trade and exports. The services we provide to the U.S. federal government are subject to the FAR, the Truth in Negotiations Act, CAS, the Services Contract Act, DoD security regulations and many other laws and regulations. These laws and regulations affect how we transact business with our clients and, in some instances, impose additional costs on our business operations. We are also governed by our own Code of Business Conduct (our "Code") and other compliance-related corporate policies and procedures that mandate compliance with these laws. Our Code is a guide for every employee in applying legal and ethical practices to our everyday work. In particular, our Code describes our standards of integrity and relevant principles and areas of law most likely to affect our business. We regularly train our employees regarding our Code and other specific areas including anti-bribery compliance and international trade compliance.
Website Access
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on our website at www.kbr.com as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the SEC. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers like us that file electronically with the SEC at www.sec.gov. We have posted our Code on our website, located at www.kbr.com. Our Code applies to all of our employees and Directors and serves as a code of ethics for our principal executive officer, principal financial officer, principal accounting officer and other persons performing similar functions. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K relating to amendments to or waivers from any provision of the Code applicable to such persons by posting such information on our website at www.kbr.com.
Item 1A. Risk Factors
Risks Related to Operations of ourOur Business
The widespread outbreak of a pandemic or epidemic, or the outbreak of an infectious disease, such as COVID-19, has materially impacted how we and our customers operate our business and the duration and extent to which they may materially adversely affect our future results of operations and financial performance remains uncertain.
The spread of COVID-19 across the globe has continued to negatively affect worldwide economic and commercial activity, disrupt global supply chains and the labor market and create significant volatility and disruption of financial and commodity markets. In response to the rapid global spread of the virus, national, state and local governments have continued to issue orders and recommendations to attempt to reduce the spread of the disease. To protect the health and safety of our employees, we have continued to limit employee and contractor presence at our work locations. Employees who were not able to work effectively from home were brought back to work at our sites with strict safety protocols in place, which are in compliance with local regulations and guidance from the Centers for Disease Control and the World Health Organization. Fluctuation in infection rates have continued and the appearance of new and more easily transmissible variants of COVID-19, such as the Delta and Omicron variants, have resulted in periodic changes in restrictions that vary from region to region and require vigilant attention and rapid response. As a result, plans to return employees to our facilities under flexible working arrangements as a part of our reimagining how we deliver transformational journey were temporarily delayed.
In September 2021, the White House issued an executive order and guidance from the Safer Federal Workforce Task Force broadly requiring many U.S.-based federal contractors to be fully vaccinated by December 8, 2021 (or to have an approved accommodation). In early November 2021, the federal government extended that deadline to January 18, 2022. On December 7, 2021, a federal district judge issued an order, temporarily suspending the government from enforcing the federal contractor mandate. That order is on appeal. In order to ensure the health and safety of our employees and to be in compliance, we required our U.S. employees to be fully vaccinated, subject to any collective bargaining or other legal obligations (including approved religious or medical accommodations and exceptions). This requirement resulted in minimal attrition that was manageable through responsive recruitment processes.
Our business and operational plans may be adversely affected by the global economic uncertainty caused by the COVID-19 pandemic due to a number of factors outside of our control that continue to develop, including:
•the duration, scope and severity of the pandemic, including the impact of variants and resurgences;
•the health or availability of our workforce, including contractors and subcontractors, and restrictions that we and our customers, contractors and subcontractors impose, including limiting worksite access and facility shutdowns, to ensure the safety of employees and others;
•an overall tightening and increasingly competitive labor market resulting in labor shortages, lack of skilled labor, increased turnover or labor inflation;
•other workforce impacts, such as difficulty recruiting, retaining, training, motivating and developing employees due to evolving health and safety protocols; changing worker expectations and talent marketplace variability regarding flexible work models; and the challenges of maintaining our strong corporate culture, which values communication, collaboration and connections, despite a majority of employees working from home;
•supply chain disruptions that impact the ability or willingness of our vendors and suppliers to provide the equipment, parts or raw materials for our operations or otherwise fulfill their contractual obligations, which in turn could impair our ability to perform under our contracts or to deliver products on a timely basis;
•recommendations of, or restrictions imposed by, government and health authorities, including travel bans, quarantines and vaccine mandates to address the COVID-19 outbreak;
•potential contract delays, modifications or terminations;
•increased potential for the occurrence of operational hazards, including terrorism, cyber-attacks or domestic vandalism, as well as information system failures or communication network disruptions;
•reductions in the number and amounts of new government contract awards, delays in the timing of anticipated awards or potential cancellations of such prospects as a result of the fiscal, economic and budgetary challenges facing our customers, including increased material and equipment costs resulting from inflation and supply chain disruptions;
•increased cost and reduced availability of capital for growth or capital expenditures;
•increased costs of operation attributed to inflation, which costs may not be fully recoverable or adequately covered by insurance; and
•long-term disruption of the U.S. and global economy and financial and commodity markets.
The spread of COVID-19 has caused us to significantly modify our business practices, and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, contractors, customers, suppliers and communities. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be adversely impacted.
As the potential effects of COVID-19 are difficult to predict, the duration of any potential business disruption or the extent to which COVID-19 may negatively affect our operating results is uncertain. Any potential impact will depend on future developments and new information that may emerge regarding the spread, severity and duration of the COVID-19 pandemic and the actions taken by authorities to contain it or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our business, financial condition, results of operations and/or cash flows, as well as our ability to pay dividends to our shareholders.
Our results of operations and cash flows depend on the award of new contracts and the timing of the performance of these contracts.
Our revenues are directly or indirectly derived from contract awards. Reductions in the number and amounts of new awards, delays in the timing of anticipated awards or potential cancellations of such prospects as a result of economic conditions, material and equipment pricing and availability or other factors could adversely impact our long-term projected results. It is particularly difficult to predict whether or when we will receive large-scale international and domestic projects as these contracts usually involve a lengthy and complex bidding and selection process. This process can be affected by a number of factors including market conditions and governmental and environmental approvals. BecauseAs a portion of our revenues is generated from such projects, our results of operations and cash flows can fluctuate significantly from quarter to quarter depending on the timing of our contract awards and the commencement or progress of work under awarded contracts. In addition, many of these contracts are subject to financing and similar contingencies and, as a result, we are subject to the risk that the customer will not be able to secure the necessary financing for a project to proceed.
The uncertainty of our contract award timing can also present difficulties in matching workforce size with contract needs. In some cases, we maintain and bear the cost of a ready workforce that is larger than necessary under existing contracts in expectation of future workforce needs for anticipated contract awards. If an anticipated contract award is delayed or not received, we may incur additional costs resulting from reductions in staff or redundancy of facilities that could have a material adverse effect on our business, financial condition and results of operations.
The U.S. government awards its contracts through a rigorous competitive process andA portion of our efforts to obtainrevenues is generated by large, recurring business from certain significant customers. A loss, cancellation or delay in projects by our significant customers in the future contractscould negatively affect our financial performance.
A considerable percentage of our revenues, particularly in our GS business segment, is generated from transactions with certain significant customers. Revenues from the U.S. government represented 70% of our total consolidated revenues for the year ended December 31, 2021. The loss of one or more of our significant customers, or the cancellation or delay in their projects, could adversely affect our revenues and results of operations.
If we are unable to enforce our intellectual property rights, or if our intellectual property rights become obsolete, our competitive position could be adversely impacted.
We utilize a variety of intellectual property rights in providing services to our customers. We view our portfolio of process and design technologies as one of our competitive strengths and we use it as part of our efforts to differentiate our service offerings. We may not be able to successfully preserve these intellectual property rights in the future, and these rights could be invalidated, circumvented, challenged or infringed upon. In addition, the laws of some foreign countries in which our services may be unsuccessful.
The U.S. government conducts a rigorous competitive process for awarding most contracts. Insold do not protect intellectual property rights to the services arena,same extent as the laws of the U.S. government uses multiple contracting approaches. Historically, omnibus contract vehicles have been used for workWe also license technologies from third parties and there is a risk that is done on a contingencyour relationships with licensors may terminate, expire or as-needed basis. In more predictable “sustainment” environments, contracts may include both fixed-pricebe interrupted or harmed. If we are unable to protect and cost-reimbursable elements. The U.S. government also favors multiple award task order contracts in which several contractorsmaintain our intellectual property rights, or if there are selected as eligible bidders for future work. Such processes requireany successful contractorsintellectual property challenges or infringement proceedings against us, our ability to continually anticipate customer requirements and develop rapid-response bid and proposal teams as well as maintain supplier relationships and delivery systems to react to emerging needs.differentiate our service offerings could diminish. In addition, U.S. government procurement practices sometimes emphasize price over qualitative factors, such as technical capabilityif our intellectual property rights or work processes become obsolete, we may not be able to differentiate our service offerings and past performance.some of our competitors may be able to offer more attractive services to our customers. As a result, our business and financial performance could be materially and adversely affected.
We may not properly leverage or appropriately invest in technology advancements, which could diminish any sustainable competitive advantage in our service offerings resulting in the potential loss of thesemarket share and profits.
Our business is dependent on information technology as we operate in global markets with customers who demand innovation, technical and domain expertise and digitally-enabled, technology-led solutions. Robust information technology systems, platforms and products are integral in our efforts to differentiate our service offerings and maintain our competitive pricing pressures,advantages. It is strategically important that we lead the digital transformation occurring in our profit margins on future U.S. government contractsindustry. We may not be reducedsuccessful in structuring our technology or developing, acquiring or implementing technology systems which are competitive and responsive to the needs of our customers. We may require uslack sufficient resources to continue to make sustained effortsthe significant technology investments to reduce costseffectively compete with our competitors. Certain technology initiatives that management considers important to remain competitive.
We face rigorous competitionour long-term success will require capital investment, have significant risks associated with their execution and pricing pressures for any additional contract awards from the U.S. government. Many ofcould take several years to implement. If we are unable to develop and implement these initiatives in a cost-effective, timely manner or at all, it could damage our existing contracts must be recompeted when their original period of performance ends. Recompetitions represent opportunities for competitors to take market share away from us or forrelationships with our customers to obtain more favorable terms. We mayand negatively impact our financial condition and results of operations. There can be required to qualifyno assurance that others will not acquire similar or continue to qualify under the various multiple award task order contract criteria. Therefore, it may be more difficult for us to win future awards from the U.S. government andsuperior technologies sooner than we may have other contractors sharing in U.S. government awardsdo or that we win. Oncewill acquire technologies on an exclusive basis or at a contract is awarded, it maysignificant price advantage. If we do not accurately predict, prepare and respond to new technology innovations, market developments and changing customer needs, our revenues, profitability and long-term competitiveness could be subject to a lengthy protest process that could result in contract delays, or ultimately, the loss of the contract. As discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report on Form 10-K, the award of the Logistics Civil Augmentation Program ("LOGCAP") V to us in April 2019 by the U.S. Army is currently under protest.materially adversely affected.
If we are unable to attract and retain a sufficient number of affordable trained engineers, craft labor,senior management and other skilled workers,key technical professionals with elite skills, our ability to pursue and compete for projects to grow our business may be adversely affected, our operating income may decrease and our costsreputation may increase.be negatively impacted.
The reimagined KBR and its forward-looking solutions strategy requires talent with dynamic and elite skills as KBR moves upmarket. Our rate of growth and the success of our business depend upon our ability to attract, develop, retain and retain a sufficient number of affordable trained engineers, craft laborreplace key qualified technical and other skilled workersmanagement professionals, either through direct hire, subcontracts or acquisition of other firms, employing such professionals.who possess the elite skills to successfully deliver the solutions strategy. The market for these professionals is competitive.competitive in the sectors in which we compete, and we rely heavily upon the expertise and leadership of our professionals to perform, execute and complete projects as required by our clients. If we are unable to attract and retain a sufficient number of elite skilled personnel,professionals, our ability to pursue projects may be adversely affected, the costs of executing our existing and future projectsoperating income may increasedecline, and our financial performancereputation may decline.be damaged.
DependenceOur future success depends on third-party subcontractors and equipment manufacturers could adversely affect our profits.
We rely on third-party subcontractors and equipment manufacturers in order to complete manythe continued services of our projects. To the extent that we cannot engage subcontractors or acquire equipment or materials in the amounts and at the costs originally estimated,executive officers as well as our ability to complete a project in a timely fashion or at a profit may be impaired. If the amount we are requiredeffectively transition to pay for these goods and services exceeds the amount we have estimated in bidding for fixed-price contracts, we could experience losses in the performance of these contracts. Furthermore, certain subcontractors and suppliers, such as those used on our U.S. government contracts, are subjecttheir successors. Our inability to the same rigorous government requirements that we are and if they are unable to comply with these requirements, there may be limited subcontractors and suppliers available in the market. In addition, if any subcontractor or a manufacturer is unable to deliver its services, equipment or materials according to the negotiated terms for any reason including, but not limited to, the deterioration of its financial condition, we may be required to purchase the services, equipment or materials from another source at a higher price. This may reduce the profit we expect to realize or result in a loss on a project for which the services, equipment or materials were needed.
Some of our U.S. government work requires KBR and certain of its employees to qualify forattract, develop and retain a government-issued security clearance.
We currently hold U.S. government-issued facility security clearances and a large number ofqualified employees that can succeed our employees have qualified for and hold U.S. government-issued personal security clearances necessary to qualify for and ultimately perform certain U.S. government contracts. Obtaining and maintaining security clearances for employees involves lengthy processes, and it is difficult to identify, recruit and retain employees who already hold security clearances. If our employees are unable to obtain or retain security clearances or if our employees who hold security clearances terminate employment with us and we are unable to find replacements with equivalent security clearances, we may be unable to perform our obligations to customers whose work requires cleared employees, or such customers could terminate their contracts or decide not to renew them upon their expiration. Our facility security clearances could be marked as "invalid" for several reasons including unapproved foreign ownership, control or influence, mishandling of classified materials, or failure to properly report required activities. An inability to obtain or retain our facility security clearances or engage employees with the required security clearances for a particular contract could disqualify us from bidding for and winning new contracts with security requirements as well as result in the termination of any existing contracts requiring such clearances.
Our use of the cost-to-cost method of revenue recognition could result in a reduction or reversal of previously recorded revenues and profits.
A significant portion of our revenues and profits are measured and recognized over time using the cost-to-cost method of revenue recognition. Our use of this accounting method results in recognition of revenues and profits over the life of a contract, based generally on the proportion of costs incurred to date to total costs expected to be incurred for the entire project. The effects of revisions to estimated revenues and costs are recorded when the amounts are known or can be reasonably estimated. In addition, we have recorded significant unapproved change orders and claims against clients as well as estimated recoveries of claims against suppliers and subcontractors that have been included in the estimated profit at completion for certain projects. Revisions to these estimates could occur in any period and their effects could be material. The uncertainties inherent in estimating the progress towards completion or the recoverability of claims of long-term engineering, program management, construction management or construction contracts make it possible for actual revenues and costs to vary materially from our estimates, including reductions or reversals of previously recorded revenues and profits.
We conduct a portion of our operations through joint ventures and partnerships, exposing us to risks and uncertainties, many of which are outside of our control.
We conduct a portion of our operations through project-specific joint ventures where control may be shared with unaffiliated third parties. As with any joint venture arrangement, differences in views among the joint venture partners may result in delayed decisions or in failures to agree on major issues. We also cannot control the actions of our joint venture partners, including failure to comply with applicable laws or regulations, nonperformance, default or bankruptcy of our joint venture partners. Also, we often share liabilities on a joint and several basis with our joint venture partners under these arrangements. If our partners do not meet their contractual obligations, the joint venture may be unable to adequately perform and deliver its contracted services, requiring us to make additional investments or perform additional services to ensure the adequate performance and delivery of services to the customer. We could be liable for both our obligations and those of our partners, which may result in reduced profits or, in some cases, significant losses on the project. Additionally, these factors could have a material adverse effect on the business operations of the joint venture and, in turn, our business operations and reputation.
Operating through joint ventures in which we have a minority interest could result in us having limited control over many decisions made with respect to projects and internal controls relating to projects. These joint ventures may not be subject to the same requirements regarding internal controls as we are. As a result, internal control issues may arise, whichexecutive officers could have a material adverse effect on our financial conditionoperating income and results of operations.
The nature of our contracts, particularly those that are fixed-price, subjects us to risks associated with cost overruns, operating cost inflation and potential claims for liquidated damages.
We conduct our business under various types of contracts where costs must be estimated in advance of our performance. A portion of the value of our current backlog is attributable to fixed-price contracts where we bear a significant portion of the risk of cost overruns. These types of contracts are priced, in part, on cost and scheduling estimates that are based on assumptions including prices and availability of experienced labor, equipment and materials as well as productivity, performance and future economic conditions. If these estimates prove inaccurate, if there are errors or ambiguities as to contract specifications or if circumstances change due to, among other things, unanticipated technical problems, poor project execution, difficulties in obtaining permits or approvals, changes in local laws or labor conditions, weather delays, changes in the costs of equipment and materials or our suppliers’ or subcontractors’ inability to perform, then cost overruns may occur. We may not be able to obtain compensation for additional work performed or expenses incurred. Additionally, we may be required to pay liquidated damages upon our failure to meet schedule or performance requirements of our contracts. Our failure to accurately estimate the resources and time required for fixed-price contracts or our failure to complete our contractual obligations within a specified time frame or cost estimate could result in reduced profits or, in certain cases, a loss for that contract. If the contract is significant, or we encounter issues that impact multiple contracts, cost overruns could have a material adverse effect on our business, financial condition and results of operations.
reputation.
See Note 8 to our consolidated financial statements and below under "
The nature of our commercial business exposes us to potential liability claims and contract disputes that may exceed or be excluded from existing insurance coverage." for further discussion regarding cost increases and related unapproved change orders and claims on the Ichthys LNG Project.
The nature of our hydrocarbons business exposes us to potential liability claims and contract disputes that may exceed or be excluded from existing insurance coverage.
We engage in activities for large facilities where design, construction or systems failures can result in substantial injury or damage to employees or other third parties or delays in completion or commencement of commercial operations, exposing us to legal proceedings, investigations and disputes. The nature of our business results in clients, subcontractors and vendors occasionally presenting claims against us for recovery of costs they incurred in excess of what they expected to incur or for which they believe they are not contractually liable. If it is determined that we have liability, we may not be covered by insurance or, if covered, the dollar amount of these liabilities may exceed our policy limits. Our professional liability coverage is on a “claims-made” basis covering only claims actually made during the policy period currently in effect. In addition, even where insurance is maintained for such exposures, the policies have deductibles, which result in our assumption of exposure for a layer of coverage with respect to any such claims. Any liability not covered by our insurance, in excess of our insurance limits or if covered by insurance but subject to a high deductible, could result in a significant loss for us, which may reduce our profits and cash available for operations.
We occasionally bring claims against project owners for additional costs exceeding the contract price or for amounts not included in the original contract price. These types of claims occur due to matters such as owner-caused delays or changes from the initial project scope that may result in additional direct and indirect costs. Often these claims can be the subject of lengthy negotiations, arbitration or litigation proceedings, and it is difficult to accurately predict when these claims will be fully resolved. When these types of events occur and unresolved claims are pending, we may invest significant working capital in projects to cover cost overruns pending the resolution of the relevant claims. A failure to fully or promptly recover on these types of claims fully or promptly could have a material adverse impact on our liquidity and financial results.
For example, we executedhave a project as a partner30% ownership interest in the JKC joint venture with JGC("JKC"), which was contracted to perform the engineering, procurement, supply, construction and Chiyoda, oncommissioning of onshore LNG facilities for a jointclient in Darwin, Australia (the "Ichthys LNG Project"). The construction and several basis, for the design, procurement, fabrication, construction, commissioning and testing of the Ichthys Onshore LNG exportProject is complete, and the facility in Darwin, Australia. As further discussed in Notes 8has been handed over to the client and 12 to our consolidated financial statements, theis producing LNG. The project experienced significant cost increases associated with a variety of issues related to delays, changes toin the scope of work delays and lower than plannedexpected subcontractor productivity. These issues resulted in significant unapproved change orders and claims against the client as well as estimated recoveries of claims against suppliers and subcontractors that have been included in the project estimates-at-completion. Additionally, we fundedOn October 21, 2021, JKC for our proportionate shareentered into a binding settlement agreement (the "Settlement Agreement") that resolved the outstanding claims and disputes between JKC and its client, Ichthys LNG Pty, Ltd (collectively, "the Parties"). As a result of the working capital requirementsSettlement Agreement, the Parties agreed to withdraw all claims and terminate all ongoing arbitration and court proceedings between the Parties.
Dependence on third-party subcontractors and equipment manufacturers could adversely affect our financial performance on contracts.
We rely on third-party subcontractors and equipment manufacturers in order to complete many of our projects. Certain subcontractors and suppliers, such as those used on our U.S. government contracts, are subject to the project. JKC's current estimatessame rigorous government requirements that we are and if they are unable to comply with these requirements, there may be limited subcontractors and suppliers available in the market. In addition, if any subcontractor or a manufacturer is unable to deliver its services, equipment or materials according to the negotiated terms for any reason including, but not limited to, the deterioration of its financial condition, we may be required to purchase the services, equipment or materials from another source at a higher price. This may reduce the profit we expect to realize or result in a loss on a project for which the services, equipment or materials were needed. Furthermore, if the amount we are required to pay for these goods and services exceeds the amount we have estimated in bidding for fixed-price contracts, we could experience losses in the performance of these contracts.
Our use of the cost-to-cost method of revenue recognition could result in a reduction or reversal of previously recorded revenues and profits.
A significant portion of our revenues and profits are measured and recognized over time using the cost-to-cost method of revenue recognition. Our use of this accounting method results in recognition of revenues and profits over the life of a contract, based generally on the proportion of costs incurred to date to total costs expected to be incurred for the entire project. The effects of revisions to estimated revenues and costs are recorded when the amounts are known or can be reasonably estimated. In addition, we record unapproved change orders and claims against the client andclients as well as estimated recoveries of claims against suppliers and subcontractors that have been included in the estimated profit at completion for certain projects. Revisions to these estimates could occur in any period and their effects could be material. The uncertainties inherent in estimating the progress towards completion or the recoverability of claims of long-term contracts make it possible for actual revenues and costs to vary materially from our estimates, including reductions or reversals of previously recorded revenues and profits.
We conduct a portion of our operations through joint ventures and partnerships, exposing us to risks and uncertainties, many of which are outside of our control.
We conduct a portion of our operations through project-specific joint ventures where control may prove inaccurate and potentially resultbe shared with unaffiliated third parties. As with any joint venture arrangement, differences in refunds to the client for amounts previously paid toviews among the joint venture partners may result in delayed decisions or in failures to agree on major issues. We also cannot control the inabilityactions of our joint venture partners, including failure to comply with applicable laws or regulations, nonperformance and default or bankruptcy of our joint venture partners. Also, we often share liabilities on a joint and several basis with our joint venture partners under these arrangements. If our partners do not meet their contractual obligations, the joint venture may be unable to adequately perform and deliver its contracted services, requiring us to make additional investments or perform additional services to ensure the adequate performance and delivery of services to the customer, which could ultimately result in litigation. We could be liable for both our obligations and those of our partners, which may result in reduced profits, significant losses on the project and a negative impact to our cash flows. Additionally, these factors could have a material adverse effect on the business operations of the joint venture and, in turn, our business operations and reputation.
Operating through joint ventures in which we have a minority interest could result in us having limited control over many decisions made with respect to recover additionalprojects and internal controls relating to projects. These joint ventures may not be subject to the same requirements regarding internal controls that are applicable to us. As a result, internal control issues may arise, which could have a material adverse effect on our financial condition and results of operations.
The nature of our contracts, particularly those that are fixed-price, subjects us to risks associated with cost overruns, operating cost inflation and potential claims for liquidated damages.
We conduct our business under various types of contracts where costs from its suppliersmust be estimated in advance of our performance. A portion of the value of our current backlog is attributable to fixed-price contracts where we bear a significant portion of the risk of cost overruns. These types of contracts are priced, in part, on cost and subcontractors. We have lettersscheduling estimates that are based on assumptions including pricing and availability of credit outstanding in support ofexperienced labor, equipment and materials as well as productivity, performance and warranty guaranteesfuture economic conditions. If these estimates prove inaccurate, if there are errors or ambiguities as to contract specifications or if circumstances change due to, among other things, unanticipated technical problems, poor project execution, difficulties in obtaining permits or approvals, changes in local laws or labor conditions, weather delays, changes in the costs of equipment and materials or our suppliers’ or subcontractors’ inability to perform, then cost overruns may occur. We may not be able to obtain compensation for additional work performed or expenses incurred. Additionally, we may be required to pay liquidated damages upon our failure to meet schedule or performance requirements of our contracts. Our failure to accurately estimate the resources and time required for fixed-price contracts or our failure to complete our contractual obligations within a specified time frame or cost estimate could result in reduced profits or, in certain cases, a loss for that contract. If the contract is significant, or we encounter issues that impact multiple contracts, cost overruns could have a material adverse effect on our business, financial condition and results of operations.
The transition period resulting from the Referendum of the United Kingdom's Membership of the European Union could adversely affect our business, financial condition and results of operations.
The U.K. formally exited the European Union (“Brexit”) on January 31, 2020, followed by a transition period from February through December 2020, during which the U.K. continued to remain in the European Union as it negotiated separate trade deals with the European Union and other countries. On December 24, 2020, the U.K. announced that it had reached agreement on a draft EU-UK Trade and Cooperation Agreement (“TCA”). The U.K. Parliament ratified the U.K.’s entry into, and implementation of, the TCA on December 30, 2020 pursuant to the EU (Future Relationship) Act 2020. The TCA offers the U.K. and European Union companies preferential access to each other’s markets, ensuring imported goods will be free of tariffs and quotas; however, economic relations between the U.K. and the European Union will now be on more restricted terms. Additionally, the TCA does not incorporate the full scope of the services sector, and businesses such as banking and finance continue to face uncertainty. In March 2021, the U.K. and the European Union agreed on a framework for voluntary regulatory cooperation and discussion on financial services issues in a Memorandum of Understanding, which is expected to be signed after formal steps are completed.
The effects of Brexit will continue to depend on any agreements the U.K. has signed or will sign in the future to retain access to European Union markets. Brexit could adversely affect U.K., European and worldwide economic and market conditions, could contribute to instability in some global financial and foreign exchange markets, including continued volatility in the value of the British pound sterling or could otherwise adversely affect trading agreements or similar cross-border cooperation arrangements (whether economic, tax, legal, regulatory or otherwise). Volatility in currency exchange rates primarily impacts the translation of the financial results of the U.K. portion of our GS business segment. Brexit could also disrupt the free movement of goods, services and people between the U.K. and the European Union, and result in increased legal and regulatory complexities, as well as potential higher costs of conducting business in Europe. These developments, or the perception that any of them could occur, may adversely affect our relationships with our existing and future customers, suppliers, employees and subcontractors and may have an adverse impact on our business, financial condition and results of operations.
We work in locations and on projects where there are high security risks, which could result in substantial costs, damage to our reputation and harm to our employees, contractors and clients.
Some of our services are performed in high-risk locations, including but not limited to, Iraq, Afghanistan and certain parts of Africa and the Middle East, where the country or surrounding area is suffering from political, social or economic issues, war or civil unrest. In those locations where we have employees or operations, we may incur substantial costs to maintain the safety of our personnel and clients. Despite these precautions, we have suffered the loss of employees and contractors in the past that resulted in claims and litigation. Furthermore, there is risk of mass casualty or environmentally damaging events that may involve our and third-party personnel and property, which could lead to future claims and litigation, impact our reputation and investor confidence and ultimately result in reduced share price.
Specifically, due to the complex humanitarian, logistical and multi-agency contractual challenges presented by OAW, several threats are present, including the threat of injury or death to Afghan guests, clients or third-party personnel, damage to client facilities and work performed by KBR or its subcontractors inconsistent (or alleged to be calledinconsistent) with the client contracts. This could result in significant financial claims by the client, under certain events. Tounfavorable reports from the media and local communities, financial losses and significant damage to our reputation.
Additionally, as a result of our historical employment of Afghan nationals from 2002 to 2010 and the continuing obligation to provide verification of past employment to these individuals in relation to their application for Special Immigrant Visas ("SIVs"), if we are unable to verify past employment in a timely manner, we could be subject to investigation and/or at risk of damage to our reputation.
Our backlog of unfilled orders is subject to unexpected adjustments and cancellations and, therefore, may not be a reliable indicator of our future revenues or earnings.
As of December 31, 2021, the extent these lettersfuture revenues we expect to realize as a result of creditbacklog was approximately $15.0 billion. We cannot guarantee that the revenues projected in our backlog will be realized or that the projects will be profitable. Many of our contracts are calledsubject to cancellation, termination or suspension at the discretion of the customer. From time to time, changes in project scope may occur with respect to contracts reflected in our backlog and could reduce the dollar amount of our backlog or the timing of the revenues and profits that we ultimately earn. Projects may remain in our backlog for an extended period of time because of the nature of the project and the timing of the particular services or equipment required by the client,project. Delays, suspensions, cancellations, payment defaults, scope changes and poor project execution could materially reduce or eliminate profits that we would be requiredactually realize from projects in backlog. We cannot predict the impact that future economic conditions may have on our backlog, which could include a diminished ability to use available cash to repay our lenders and could also be required to cash collateralize the remaining balance of outstanding letters of credit. Any of these eventsreplace backlog once projects are completed or could result in the termination, modification or suspension of projects currently in our backlog. Such developments could have a material changes to the estimated revenue, costs and profits at completionadverse effect on the project and adversely affect our financial condition, results of operations and cash flows.
We make equity investments in privately financed projects in which we could sustain significant losses.
We participate in privately financed projects that enable governments and other customers to finance large-scale projects, such as the acquisition and maintenance of major military equipment, capital projects and service purchases. These projects typically include the facilitation of nonrecourse financing, the design and construction of facilities, the provision of operation and maintenance services and warranty obligations for an agreed-upon period after the facilities have been completed. We may incur contractually reimbursable costs and typically make investments prior to an entity achieving operational status or receiving project financing. If a project is unable to obtain financing, we could incur losses on our investments and any related contractual receivables. After completion of these projects, the return on our investments can be dependent on the operational success of the project and market factors that may not be under our control. As a result, we could sustain a loss on our equity investment in these projects.
We have made and may continue to make business combinations as a part of our business strategy, which may present certain risks and uncertainties.
We may continue to seek business acquisitions as a means of broadening our offerings and capturing additional market opportunities by our business segments. However, there is no guarantee that we will be successful in identifying target companies that meet our criteria for acquisition. We may also face increased competition from other potential acquirers who have greater financial resources or who are in a position to offer more favorable terms to the target company. This competition may limit our ability to pursue acquisition opportunities which could negatively affect our growth strategies. Additionally, future acquisitions may require us to obtain additional equity or debt financing, which may not be available on attractive terms, if at all.
The success of our historical and future business combinations also depends on our ability to integrate the operations of the acquired businesses efficiently and effectively with our existing operations and realize the anticipated benefits from them. The potential risks associated with successful integration and realization of benefits include, but are not limited to the following:
•our due diligence may not identify or fully assess valuation issues, potential liabilities or other acquisition risks;
•acquired entities may not achieve anticipated revenue targets, cost savings or other synergies or benefits, or acquisitions may not result in improved operating performance, which could adversely affect our operating income or operating margins, and we may be unable to recover investments in any such acquisitions;
•we may have difficulty integrating acquired businesses, resulting in unforeseen difficulties, such as incompatible accounting, information management or other control systems, and greater expenses than expected;
•we may have difficulty entering into new markets in which we are not experienced, in an efficient and cost-effective manner while maintaining adequate standards, controls and procedures;
•key personnel within an acquired organization may resign from their related positions resulting in a significant loss to our strategic and operational efficiency associated with the acquired company;
•the effectiveness of our daily operations may be reduced by the redirection of employees and other resources to acquisition activities;
•we may assume liabilities of an acquired business (including litigation, tax liabilities, contingent liabilities, environmental issues), including liabilities that were unknown at the time of the acquisition, that pose future risks to our working capital needs, cash flows and the profitability of related operations;
•we may assume unprofitable projects that pose future risks to our working capital needs, cash flows and the profitability of related operations; or
•business acquisitions may include substantial transactional costs to complete the acquisition that exceed the estimated financial and operational benefits.
International and political events may adversely affect our operations.
A portion of our revenues is derived from foreign operations, which exposes us to risks inherent in doing business in each of the countries where we transact business. The occurrence of any of the risks described below could have a material adverse effect on our business operations and financial performance. With respect to any particular country, these risks may include, but not be limited to:
•expropriation and nationalization of our assets in that country;
•political and economic instability;
•changes in trade policies affecting the markets for our services (including but not limited to retaliatory tariffs between the United States and other countries);
•civil unrest, acts of terrorism, war or other armed conflict (including but not limited to potential U.S. sanctions on other countries);
•currency fluctuations, devaluations and conversion restrictions;
•confiscatory taxation or other adverse tax policies;
•uncertainties related to any geopolitical, economic and regulatory effects or changes due to recent or upcoming domestic and international elections;
•governmental activities or judicial actions that limit or disrupt markets, restrict payments, limit the movement of funds, result in the deprivation of contract rights or result in the inability for us to obtain or retain licenses required for operation; or
•increased polarization of political parties, in the U.S. and abroad, which may lead to more volatility in government spending or other developments such as trade wars or changes in military priorities.
Due to the unsettled political conditions in countries where we provide governmental logistical support, our financial performance is subject to the adverse consequences of war, the effects of terrorism, civil unrest, strikes, currency controls and governmental actions. Our operations are conducted in areas that have significant political risk. In addition, military action or unrest could disrupt our operations in such locations and elsewhere and increase our costs related to security worldwide.
We rely on internal and external information technology ("IT") systems to conduct our business, and disruption, failure or security breaches of these systems could adversely affect our business and results of operations.
We utilize, develop, install and maintain a number of information technology systems both for us and for our customers. Additionally, we utilize and rely on external systems maintained by our service providers. These activities may involve substantial risks to our ongoing business processes including, but not limited to, accurate and timely customer invoicing, employee payroll processing, vendor payment processing and financial reporting. If these implementation activities are not executed successfully or if we encounter significant delays in our implementation efforts, we could experience interruptions to our business processes. Under certain contracts with the U.S. government subject to the FAR and CAS, the adequacy of our business processes and related systems could be called into question. The occurrence of such events could have a material adverse impact on our business, financial condition, results of operations and cash flows.
Various privacy and security laws require us to protect sensitive and confidential information from disclosure. In addition, we are bound by our client and other contracts, as well as our own business practices, to protect our and certain third party confidential and proprietary information from disclosure. We rely upon industry accepted security measures and technology to secure such confidential and proprietary information maintained on our IT systems. However, our portfolio of hardware and software products, solutions and services and information contained within our enterprise IT systems and external systems maintained by our service providers may be vulnerable to damage or disruption caused by circumstances beyond our control such as catastrophic events, cyberattacks inclusive of malware/computer viruses, ransomware and phishing attacks, insider threats related to malicious and non-malicious activities from authorized and unauthorized employees or third parties, power outages, natural disasters, computer system or network failures or physical break-ins. The failure of our internal or external IT systems to perform as anticipated for any reason could disrupt our business and result in decreased performance, significant remediation costs, transaction errors, loss of data (including personally identifiable information), processing inefficiencies, downtime, litigation and the loss of suppliers or customers. Any significant disruptions or failures could damage our reputation or have a material adverse effect on our business operations, financial performance and financial condition.
An impairment of all or part of our goodwill or our intangible assets could have a material adverse impact on our net earnings and net worth.
As of December 31, 2021, we had $2.1 billion of goodwill and $708 million of intangible assets recorded on our consolidated balance sheets. Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. We perform an annual analysis of our goodwill on October 1 to determine if it has become impaired. We perform an interim analysis to determine if our goodwill has become impaired if events occur or circumstances change that would more likely than not reduce our enterprise fair value below its book value. These events or circumstances could include a significant change in the business climate, including a significant sustained decline in a reporting unit’s market value, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of our business, potential government actions toward our facilities and various other factors. If the fair value of a reporting unit is less than its carrying value, we could be required to record an impairment charge. An impairment of all or a part of our goodwill or intangible assets could have a material adverse effect on our net earnings and net worth.
Our actual results could differ from the estimates and assumptions used to prepare our financial statements.
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of certain assets and liabilities; the reported amounts of revenues and expenses for the periods covered and certain amounts disclosed in the notes to our consolidated financial statements. Areas requiring significant estimates and assumptions by our management include the following:
•project revenues, costs and profits on our contracts, including recognition of estimated losses on uncompleted contracts;
•award fees, costs and profits on government services contracts;
•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 investments;
•valuation of pension obligations and pension assets;
•accruals for estimated liabilities, including litigation accruals;
•consolidation of VIEs;
•valuation of share-based compensation; and
•valuation of assets and liabilities acquired in business combinations.
These estimates are based on information available through the date of the issuance of the financial statements and actual results could differ from those estimates, which could have a material adverse impact on our financial condition and results of operations.
We ship a significant amount of cargo using seagoing vessels, exposing us to certain maritime risks.
We execute different projects in remote locations around the world and procure equipment and materials on a global basis. Depending on the type of contract, location, nature of the work and the sourcing of equipment and materials, we may charter seagoing vessels under time and bareboat charter arrangements and assume certain risks typical of those agreements. Such risks may include damage to the ship, liability for cargo and liability that charterers and vessel operators have to third
parties “at law.” In addition, we ship a significant amount of cargo and are subject to hazards of the shipping and transportation industry.
Risks Related to Our Industry
The U.S. government awards its contracts through a rigorous competitive process and our efforts to obtain future contracts from the U.S. government may be unsuccessful.
The U.S. government conducts a rigorous competitive process for awarding most contracts. In the services arena, the U.S. government uses multiple contracting approaches. Historically, omnibus contract vehicles have been used for work that is done on a contingency or as-needed basis. In more predictable “sustainment” environments, contracts may include fixed-price, cost-reimbursable and time-and-materials elements. The U.S. government also favors multiple award task order contracts in which several contractors are selected as eligible bidders for future work. Such processes require successful contractors to continually anticipate customer requirements and develop rapid-response bid and proposal teams as well as maintain supplier relationships and delivery systems to react to emerging needs. In addition, U.S. government procurement practices sometimes emphasize price over qualitative factors, such as technical capability and past performance. As a result of these competitive pricing pressures, our profit margins on future U.S. government contracts may be reduced and may require us to make sustained efforts to reduce costs to remain competitive.
We face rigorous competition and pricing pressures for any additional contract awards from the U.S. government. Many of our existing contracts must be recompeted when their original period of performance ends. Recompetitions represent opportunities for competitors to take market share away from us or for our customers to obtain more favorable terms. We may be required to qualify or continue to qualify under the various multiple award task order contract criteria. Therefore, it may be more difficult for us to win future awards from the U.S. government and we may have other contractors sharing in U.S. government awards that we win. Once a contract is awarded, it may be subject to a lengthy protest process that could result in contract delays, or ultimately, the loss of the contract.
Heightened competition could impact our ability to obtain contracts which could reduce our market share and profits.
We serve markets that are global and highly competitive. We compete with larger companies that have greater name recognition, financial resources and a larger technical staff. We also compete with smaller, more specialized companies that are able to concentrate their resources on particular areas. Additionally, we compete with the U.S. government’s own capabilities.
The markets in which we operate are characterized by rapidly changing technology and the needs of our customers change and evolve regularly. Therefore, our success depends on our ability to invest in and develop our people and technology to enable us to deliver services and products that address these changing needs. To remain competitive, we must consistently provide superior service, technology and performance on a cost-effective basis to our customers while understanding customer priorities and maintaining customer relationships. Our competitors may be able to provide our customers with differentiated or superior capabilities or technologies or more attractive contract terms than we can provide, including technical qualifications, past contract experience, geographic presence, price and the availability of qualified professional personnel. Some of our competitors have made or could make acquisitions of businesses, or establish teaming or other agreements among themselves or third parties, that allow them to offer more competitive and comprehensive solutions. As a result of such acquisitions or arrangements, our current or potential competitors may be able to accelerate the adoption of new technologies that better address customer needs, devote greater resources to bring these products and services to market, initiate or withstand substantial price competition or develop and expand their product and service offerings at a more accelerated rate. These competitive pressures in our market or our failure to compete effectively may result in fewer orders, reduced revenue and margins and loss of market share.
Some of our U.S. government work requires KBR and certain of its employees to qualify for and retain a government-issued security clearance. If we are unable to hire or retain employees with adequate security clearances, we may be unable to perform our obligations to customers.
We currently hold U.S. government-issued facility security clearances and a large number of our employees have qualified for and hold U.S. government-issued personal security clearances necessary to qualify for and ultimately perform certain U.S. government contracts. Obtaining and maintaining security clearances for employees involves lengthy processes, and it is difficult to identify, recruit and retain employees who already hold security clearances. If our employees are unable to obtain or retain security clearances or if our employees who hold security clearances terminate employment with us and we are unable to find replacements with equivalent security clearances, we may be unable to perform our obligations to customers whose work requires cleared employees, or such customers could terminate their contracts or decide not to renew them upon
their expiration. Our facility security clearances could be marked as "invalid" for several reasons including unapproved foreign ownership, control or influence, mishandling of classified materials or failure to properly report required activities. An inability to obtain or retain our facility security clearances or engage employees with the required security clearances for a particular contract could disqualify us from bidding for and winning new contracts with security requirements as well as result in the termination of any existing contracts requiring such clearances.
Our U.S. government contract work is regularly reviewed and audited by our customer,the U.S. government, U.S. government auditors and others, and these reviews can lead to withholding or delay of payments to us, non-receipt of award fees, legal actions, fines, penalties and liabilities and other remedies against us.
U.S. government contracts are subject to specific regulations such as the FAR, the Truth in Negotiations Act, CAS, the Service Contract Act and DoD security regulations. Failure to comply with any of these regulations, requirements or statutes may result in contract price adjustments, financial penalties or contract termination. Our U.S. government contracts are subject to audits, cost reviews and investigations by U.S. government contracting oversight agencies such as the DCAA. The DCAA reviews the adequacy of, and our compliance with, our internal control systems and policies, including our labor, billing, accounting, purchasing, property, estimating, compensation and management information systems. The DCAA has the authority to conduct audits and reviews to determine if we are complying with the requirements under the FAR and CAS, pertaining to the allocation, period assignment and allowability of costs assigned to U.S. government contracts. The DCAA presents its report findings to the DCMA. Should the DCMA determine that we have not complied with the terms of our contract or applicable statutes and regulations, payments to us may be disallowed, which could result in adjustments to previously reported revenues and refunding of previously collected cash proceeds. Additionally, we may be subject to qui tam litigation brought by private individuals on behalf of the U.S. government under the Federal False Claims Act, which could include claims for treble damages. These suits may remain under seal (and hence, be unknown to us) for some time while the U.S. government decides whether to intervene on behalf of the qui tam plaintiff.
Given the demands of working for the U.S. government, we may have disagreements or experience performance issues. When performance issues arise under any of our U.S. government contracts, the U.S. government retains the right to pursue remedies, which could include termination under any affected contract. If any contract were so terminated, our ability to secure future contracts could be adversely affected. Other remedies that could be sought by our U.S. government customers for any improper activities or performance issues include sanctions such as forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with the U.S. government. Further, the negative publicity that could arise from disagreements with our customers or sanctions as a result thereof could have an adverse effect on our reputation in the industry, reduce our ability to compete for new contracts and may also have a material adverse effect on our business, financial condition, results of operations and cash flows.
International and political eventsSeveral of our contracts with the U.S. government are classified or subject to other security restrictions, which may adversely affectlimit investor insight into portions of our operations.business.
A significant portion of our revenuesrevenue is derived from foreign operations, which exposes uscontracts with the U.S. government that are classified or subject to risks inherent in doing business in eachsecurity restrictions that preclude the disclosure of the countries where we transact business. The occurrence of any of the risks described below could havecertain information. Additionally, a material adverse effect on our business operations and financial performance. With respect to any particular country, these risks may include, but not be limited to:
expropriation and nationalizationlarge number of our assetsemployees have security clearances which prohibit them from providing information to investors and other KBR employees without security clearances regarding certain clients and the related services we provide to them. As we are limited in that country;
politicalour ability to provide information about these contracts and economic instability;
civil unrest, acts of terrorism, war or other armed conflict;
currency fluctuations, devaluations and conversion restrictions;
confiscatory taxation or other adverse tax policies;
governmental activities or judicial actions that limit or disrupt markets, restrict payments, limit the movement of funds, result in the deprivation of contract rights or result in the inability for us to obtain or retain licenses required for operation; or
increased polarization of political parties, in the U.S. and abroad, which may lead to more volatility in government spending or other developmentsservices, such as trade warsthe scope of work, associated risks and any disputes or changes in military priorities.
Due to the unsettled political conditions in countries where we provide governmental logistical support,claims, our financial performance is subject to the adverse consequences of war, the effects of terrorism, civil unrest, strikes, currency controls and governmental actions. Our operations are conducted in areas thatinvestors may have significant political risk. In addition, military action or unrest in such locations could restrict the supply of oil and gas, disrupt our operations in such locations and elsewhere and increase our costs related to security worldwide.
The transition period resulting from the Referendum of the United Kingdom's Membership of the European Union could adversely affect our business and results of operations.
On June 23, 2016, the British voters voted onlimited insight into a referendum in favor of exiting the European Union, known as Brexit. The U.K. formally exited the European Union on January 31, 2020, and is currently in a transition period, during which the U.K. will continue to remain in the European Union as it negotiates separate trade deals with the European Union and other countries. The effects of Brexit will depend on any agreements the U.K. makes to retain access to European Union markets either during a transitional period or more permanently. Brexit could adversely affect U.K., European and worldwide economic and market conditions, could contribute to instability in some global financial and foreign exchange markets, including continued volatility in the value of the British pound sterling or otherwise adversely affect trading agreements or similar cross-border cooperation arrangements (whether economic, tax, legal, regulatory or otherwise) beyond the date of Brexit. Volatility in currency exchange rates primarily impacts the U.K.substantial portion of our GS business segment where both revenues and costs tendwhich may hinder their ability to be denominated in British pounds. Brexit could also disruptfully evaluate the free movement of goods, services and people between the U.K. and the European Union, and result in increased legal and regulatory complexities, as well as potential higher costs of conducting business in Europe. These developments, or the perceptionrisks related to that any of them could occur, may adversely affect our relationships with our existing and future customers, suppliers, employees, and subcontractors, or otherwise have an adverse impact on our business, financial condition and results of operations.
Our effective tax rate and tax positions may vary.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and a change in tax laws, treaties or regulations, or their interpretation, in any country in which we operate could result in higher taxes on our earnings, which could have a material impact on our earnings and cash flows from operations. In the ordinary courseportion of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are audited by various U.S. and foreign tax authorities in the ordinary course of business, and our tax estimates and tax positions could be materially affected by many factors including the final outcome of tax audits and related litigation, the introduction of new tax accounting standards, legislation, regulations and related interpretations, our global mix of earnings, the realizability of deferred tax assets and changes in uncertain tax positions. A significant increase in tax rates could have a material adverse effect on our profitability and liquidity.business.
We work in international locations where there are high security risks, which could result in harm to our employees and contractors or substantial costs.
Some of our services are performed in high-risk locations, including but not limited to, Iraq, Afghanistan and certain parts of Africa and the Middle East, where the country or surrounding area is suffering from political, social or economic issues, war or civil unrest. In those locations where we have employees or operations, we may incur substantial costs to maintain the safety of our personnel. Despite these precautions, we have suffered the loss of employees and contractors in the past that resulted in claims and litigation. In the future, the safety of our personnel in these and other locations may continue to be at risk, exposing us to the potential loss of additional employees and contractors that could lead to future claims and litigation.
We ship a significant amount of cargo using seagoing vessels, exposing us to certain maritime risks.
We execute different projects in remote locations around the world and procure equipment and materials on a global basis. Depending on the type of contract, location, nature of the work and the sourcing of equipment and materials, we may charter seagoing vessels under time and bareboat charter arrangements and assume certain risks typical of those agreements. Such risks may include damage to the ship, liability for cargo and liability that charterers and vessel operators have to third parties “at law.” In addition, we ship a significant amount of cargo and are subject to hazards of the shipping and transportation industry.
Demand for our services provided under government contracts are directly affected by spending by our customers.
We derive a significant portion of our revenues from contracts with agencies and departments of the U.S., the U.K. and Australia governments, which is directly affected by changes in government spending and availability of adequate funding. Additionally, government regulations generally include the right for government agencies to modify, delay, curtail, renegotiate or terminate contracts at their convenience any time prior to their completion. As we are a significant government contractor, our financial performance is affected by the allocation and prioritization of government spending. Factors that could affect current and future government spending include:
•policy or spending changes implemented by the current administration, defense department or other government agencies;
•failure to pass budget appropriations, continuing funding resolutions or other budgetary decisions;
•changes, delays or cancellations of government programs or requirements;
•adoption of new laws or regulations that affect companies providing services to the governments;
•curtailment of the governments’ outsourcing of services to private contractors; or
•the level of political instability due to war, conflict or natural disasters.
We face uncertainty with respect to our government contracts due to the fiscal, economic and budgetary challenges facing our customers. Potential contract delays, modifications or terminations may arise from resolution of these issues and could cause our revenues, profits and cash flows to be lower than our current projections. The loss of work we perform for governments or decreases in governmental spending and outsourcing could have a material adverse effect on our business, results of operations and cash flows.
Demand forFluctuations in commodity prices may affect our hydrocarbons servicescustomers’ investment decisions which may result in existing project cancellations or delays or changes in the timing and technologies depends on demand and capital spending by customers in their target markets, manyfunding of which are cyclical in nature.new awards.
Demand for many of our services in our commodity-based markets depends on capital spending by oil and natural gas companies, including national and international oil companies, and by industrial companies, which is directly affected by trends in oil, natural gas and commodities prices. Market prices forFluctuations in oil, natural gas and commodities have significantly declined in recent years reducing the revenues and earnings of our customers. These market conditions make it difficult for our customers to accurately forecast and plan future business trends and activities that in turn couldprices can have a significant impact on the activity levels of our businesses. Demand for LNG and other facilities for which we provide services could decrease in the event of a sustained reduction in the price and demand for crude oil or natural gas. Perceptions of longer-term lower oil and natural gas prices by oil and gas companies or longer-term higher material and contractor prices impacting facility costs can similarly reduce or defer major expenditures given the long-term nature of many large-scale projects. Prices of oil, natural gas and commodities are subject to large fluctuations in response to relatively minor changes in supply and demand, market uncertainty and a variety of other factors that are beyond our control. Factors affecting the prices of oil, natural gas and other commodities include, but are not limited to:
worldwide or regional political, social or civil unrest, military action and economic conditions;
the level of global demand for oil, natural gas, and industrial services (e.g., the reduced demand following the recent coronavirus outbreaks);
governmental regulations or policies, including the policies of governments regarding the use of energy and the exploration for and production and development of their oil and natural gas reserves;
a reduction in energy demand as a result of energy taxation or a change in consumer spending patterns;
global economic growth or decline;
the global level of oil and natural gas production;
global weather conditions and natural disasters;
oil refining capacity;
shifts in end-customer preferences toward fuel efficiency and the use of natural gas;
potential acceleration of the development and expanded use of alternative fuels;
environmental regulation, including limitations on fossil fuel consumption based on concerns about its relationship to climate change; and
reduction in demand for the commodity-based markets in which we operate.
Our backlog of unfilled orders is subject to unexpected adjustments and cancellations and, therefore, may not be a reliable indicator of our future revenues or earnings.
As of December 31, 2019, the future revenues we expect to realize as a result of backlog was approximately $14.6 billion. We cannot guarantee that the revenues projected in our backlog will be realized or that the projects will be profitable. Many of our contracts are subject to cancellation, termination or suspension at the discretion of the customer. From time to time, changes in project scope may occur with respect to contracts reflected in our backlog and could reduce the dollar amount of our backlog or the timing of the revenues and profits that we ultimately earn. Projects may remain in our backlog for an extended period of time because of the nature of the project and the timing of the particular services or equipment required by the project. Delays, suspensions, cancellations, payment defaults, scope changes and poor project execution could materially reduce or eliminate profits that we actually realize from projects in backlog. We cannot predict the impact that future economic conditions may have on our backlog, which could include a diminished ability to replace backlog once projects are completed or could result in the termination, modification or suspension of projects currently in our backlog. Such developments could have a material adverse effect on our financial condition, results of operations and cash flows.
Intense competition could reduce our market share and profits.
We serve markets that are global and highly competitive and in which a large number of multinational companies compete. These highly competitive markets require substantial resources and capital investment in equipment, technology and skilled personnel. Our projects are frequently awarded through a competitive bidding process, which is standard in the industries in which we compete. We are constantly competing for project awards based on pricing, schedule and the breadth and technical sophistication of our services. Any increase in competition or reduction in our competitive capabilities could have a material adversedirect effect on the margins we generate from our projectsprofitability and cash flow of such companies, which may impact their willingness to continue pursuing their current investments or make new capital investments. Additionally, commodity prices can also significantly affect the costs of projects. Rising commodity prices can negatively impact the potential returns on investments that are planned, as well as those in progress, and result in customers deferring new investments or canceling or delaying existing projects. To the extent commodity prices decline or fluctuate, or the perceived risk thereof, and our ability to maintaincustomers defer new investments or increase market share.
A portion of our revenues is generated by large, recurring business from certain significant customers. A loss, cancellationcancel or delay inexisting projects, by our significant customers in the future could negatively affect our revenues.
A considerable percentage of our revenues, particularly in our GS business segment, is generated from transactions with certain significant customers. Revenues from the U.S. government represented 53% of our total consolidated revenuesdemand for the year ended December 31, 2019. The loss of one or more of our significant customers, or the cancellation or delay in their projects, could adversely affect our revenues and results of operations.
If we are unable to enforce our intellectual property rights, or if our intellectual property rights become obsolete, our competitive position could be adversely impacted.
We utilize a variety of intellectual property rights in providing services to our customers. We view our portfolio of process and design technologies as one of our competitive strengths and we use it as part of our efforts to differentiate our service offerings. We may not be able to successfully preserve these intellectual property rights in the future, and these rights could be invalidated, circumvented, challenged or infringed upon. In addition, the laws of some foreign countries in which our services may be sold do not protect intellectual property rights to the same extent as the laws of the U.S. We also license technologies from third parties and there is a risk that our relationships with licensors may terminate, expire or be interrupted or harmed. If we are unable to protect and maintain our intellectual property rights, or if there are any successful intellectual property challenges or infringement proceedings against us, our ability to differentiate our service offerings could diminish. In addition, if our intellectual property rights or work processes become obsolete, we may not be able to differentiate our service offerings and some of our competitors may be able to offer more attractive services to our customers. As a result, our business and financial performance could be materially and adversely affected.
Our business strategy includes the consideration of business acquisitions,decrease, which may present certain risks and uncertainties.
We may seek business acquisitions as a means of broadening our offerings and capturing additional market opportunities by our business segments and we may be exposed to certain additional risks resulting from these activities. These risks include, but are not limited to the following:
valuation methodologies may not accurately capture the value proposition;
future completed acquisitions may not be effectively integrated within our operations, resulting in a potentially significant detriment to the associated product/service line financial results and posing additional risks to our operations as a whole;
we may have difficulty managing our growth or we may not achieve the expected growth from acquisition activities;
key personnel within an acquired organization may resign from their related positions resulting in a significant loss to our strategic and operational efficiency associated with the acquired company;
the effectiveness of our daily operations may be reduced by the redirection of employees and other resources to acquisition activities;
we may assume liabilities of an acquired business (e.g. litigation, tax liabilities, contingent liabilities, environmental issues), including liabilities that were unknown at the time of the acquisition, that pose future risks to our working capital needs, cash flows and the profitability of related operations;
we may assume unprofitable projects that pose future risks to our working capital needs, cash flows and the profitability of related operations;
business acquisitions may include substantial transactional costs to complete the acquisition that exceed the estimated financial and operational benefits; or
future acquisitions may require us to obtain additional equity or debt financing, which may not be available on attractive terms, if at all.
We rely on information technology ("IT") systems to conduct our business, and disruption, failure or security breaches of these systems could adversely affect our business and results of operations.
We utilize, develop, install and maintain a number of information technology systems both for us and for our customers. These activities may involve substantial risks to our ongoing business processes including, but not limited to, accurate and timely customer invoicing, employee payroll processing, vendor payment processing and financial reporting. If these implementation activities are not executed successfully or if we encounter significant delays in our implementation efforts, we could experience interruptions to our business processes. Under certain contracts with the U.S. government subject to the FAR and CAS, the adequacy of our business processes and related systems could be called into question. Such events could have a material adverse impact on our business, financial condition and results of operations.
Risks Related to Financial Conditions and Markets
Current or future economic conditions in the credit markets may negatively affect the ability to operate our or our customers’ businesses, finance working capital, implement our acquisition strategy and access our cash and short-term investments.
We finance our business using cash provided by operations, but also depend on the availability of and cash flows.
Various privacyaccess to credit markets, including bank credit lines, letters of credit and security laws require ussurety bonds. Our ability to protect sensitive and confidential information from disclosure. In addition, we are bound by our client and other contracts,obtain capital or financing on satisfactory terms will depend in part on prevailing market conditions as well as our own business practices,operating results. The lack of adequate credit or funding or the unavailability of funding on terms satisfactory to protect our and certain third party confidential and proprietary information from disclosure. We rely upon industry accepted security measures and technology to secure such confidential and proprietary information maintained on our IT systems. However, our portfolio of hardware and software products, solutions and services and information contained within our enterprise IT systems may be vulnerable to damage or disruption caused by circumstances beyond our control such as catastrophic events, cyberattacks, other malicious activities from unauthorized employees or third parties, power outages, natural disasters, computer system or network failures, or computer viruses. The failure of our IT systems to perform as anticipated for any reasonus, could disrupt our business and result in decreased performance, significant remediation costs, transaction errors, loss of data (e.g., personally identifiable information), processing inefficiencies, downtime, litigation and the loss of suppliers or customers. Any significant disruptions or failures could damage our reputation or have a material adverse effect on our business operations, financial performance and financial condition.performance.
Disruptions of the capital markets could also adversely affect our clients’ ability to finance projects and could result in contract cancellations or suspensions, project delays and payment delays or defaults by our clients. In addition, clients may be unable to fund new projects, may choose to make fewer capital expenditures or otherwise slow their spending on our services or seek contract terms more favorable to them. Our government clients may face budget deficits that prohibit them from funding proposed and existing projects or that cause them to exercise their right to terminate our contracts with little or no prior notice. Furthermore, any financial difficulties suffered by our subcontractors or suppliers could increase our cost or adversely impact project schedules. These disruptions could materially impact our backlog and financial performance.
An impairment of all or part ofIn addition, we are subject to the risk that the lending counterparties to our goodwillRevolver may be unable to meet their contractual obligations to us if they suffer catastrophic demands on their liquidity. We also routinely enter into contracts with counterparties, including vendors, suppliers and subcontractors that may be negatively affected by events in the capital markets. If those counterparties are unable to perform their obligations to us or our intangible assets could have a material adverse impact on our net earnings and net worth.
As of December 31, 2019,clients, we had $1.3 billion of goodwill and $495 million of intangible assets recorded on our consolidated balance sheets. Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. We perform an annual analysis of our goodwill on October 1 to determine if it has become impaired. We perform an interim analysis to determine if our goodwill has become impaired if events occur or circumstances change that would more likely than not reduce our enterprise fair value below its book value. These events or circumstances could include a significant change in the business climate, including a significant sustained decline in a reporting unit’s market value, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of our business, potential government actions toward our facilities and various other factors. If the fair value of a reporting unit is less than its carrying value, we couldmay be required to record an impairment charge. An impairmentprovide additional services or make alternate arrangements on less favorable terms with other parties to ensure adequate performance and delivery of allservice to our clients. These circumstances could also lead to disputes and litigation with our partners or a part of our goodwill or intangible assetsclients, which could have a material adverse effect on our reputation, business, financial condition and results of operations.
Furthermore, our cash balances and short-term investments are maintained in accounts held at major banks and financial institutions located primarily in North America, the U.K. and Australia. Deposits are in amounts that exceed available
insurance. Although none of the financial institutions in which we hold our cash and investments have gone into bankruptcy, been forced into receivership or have been seized by their governments, there is a risk that this may occur in the future. If this were to occur, we would be at risk of not being able to access our cash and investments, which may result in a temporary decrease in liquidity that could impede our ability to fund operations or execute acquisitions.
We may be unable to obtain new contract awards if we are unable to provide our customers with letters of credit, surety bonds or other credit enhancements.
Customers may require us to provide credit enhancements, including letters of credit, bank guarantees or surety bonds. We are often required to provide performance guarantees to customers to indemnify the customer should we fail to perform our obligations under the contract. Failure to provide the required credit enhancements on terms required by a customer may result in an inability to bid, win or comply with the contract. Historically, we have had adequate letters of credit capacity but such capacity beyond our Senior Credit Facility is generally at the provider’s sole discretion. Due to events that affect the banking and insurance markets generally, letters of credit or surety bonds may be difficult to obtain or may only be available at significant cost. Moreover, many projects are very large and complex, which often necessitates the use of a joint venture, often with a market competitor, to bid on and perform the contract. Entering into joint ventures or partnerships exposes us to the credit and performance risk of third parties, many of whom may not be financially as strong or may encounter financial difficulties. If our joint ventures or partners fail to perform, we may be required to complete the project activities. In addition, future projects may require us to obtain letters of credit that extend beyond the term of our Senior Credit Facility. Any inability to bid for or win new contracts due to the failure of obtaining adequate letters of credit, surety bonds or other customary credit enhancements could have a material adverse effect on our business prospects and future revenues.
Our Senior Credit Facility imposes restrictions that limit our operating flexibility and may result in additional expenses, and such facility may not be available if financial covenants are violated or if an event of default occurs.
Our Senior Credit Facility includes a $1 billion revolving credit facility which matures in November 2026. It contains a number of covenants restricting, among other things, our ability to incur liens and indebtedness, sell assets, repurchase our equity shares and make certain types of investments. We are also subject to certain financial covenants, including but not limited to maintenance of a maximum consolidated net earningsleverage ratio and net worth. For a further discussionconsolidated interest coverage ratio as defined in the Senior Credit Facility agreement.
A breach of goodwill impairment testing, see "Item 7 - Management's Discussionany covenant or our inability to comply with the required financial ratios could result in a default under our Senior Credit Facility, and Analysiswe can provide no assurance that we will be able to obtain the necessary waivers or amendments from our lenders to remedy a default. In the event of Financial Conditionany default not cured or waived, the lenders are not obligated to provide funding or issue letters of credit and Resultscould elect to require us to apply available cash to collateralize any outstanding letters of Operations" belowcredit and Note 11declare any outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable, thus requiring us to apply available cash to repay any borrowings then outstanding. If we are unable to cash collateralize our letters of credit or repay borrowings with respect to our Senior Credit Facility when due, our lenders could proceed against the guarantees of our major domestic subsidiaries. If any future indebtedness under our Senior Credit Facility is accelerated, we can provide no assurance that our assets would be sufficient to repay such indebtedness in full.
LIBOR is expected to no longer be available after June 30, 2023 for the primary U.S. dollar LIBOR settings used by the Company. As a result, there have been significant efforts by market participants and government and regulatory bodies in the United States and abroad to identify suitable replacement rates and develop processes for migration to the use of the alternatives. Our Senior Credit Facility gives us the option to use LIBOR as a funding benchmark and our interest rate swaps are based on the one-month U.S. dollar LIBOR. Our Senior Credit Facility allows us and the administrative agent to replace LIBOR with an alternative benchmark rate, subject to the right of the majority of the lenders to object thereto, as set forth in the Senior Credit Facility. The International Swaps and Derivatives Association has issued terms that can be applied to determine the alternative reference rates under swap transactions and the timing of the switch to such alternatives. Any discontinuation of LIBOR and use of an alternative benchmark rate under our credit facility or our interest rate swap transactions is expected to be accompanied by a spread adjustment. The implementation of such alternative reference rates and spread adjustments could cause our funding costs to increase, including if there arises a differential between the alternative reference rate and/or spread adjustment under our credit facility and the alternative reference rate and/or spread adjustment applicable to our interest rate hedges.
Our indebtedness and the associated covenants could materially adversely affect our ability to obtain additional financing, including for acquisitions and capital expenditures, limit our flexibility to manage our business, prevent us from fulfilling our financial obligations and restrict our use of capital.
We had approximately $1.9 billion of indebtedness outstanding as of December 31, 2021 which could have negative consequences to us, including, but not limited to:
•requiring us to dedicate cash flow from operations to the repayment of debt, interest and other related amounts, which reduces the funds we have available for other purposes, such as working capital, capital expenditures, acquisitions, payment of dividends and share repurchase programs;
•making it more difficult or expensive for us to obtain any necessary future financing for working capital, capital expenditures, debt service requirements, debt refinancing, acquisitions or other purposes;
•reducing our flexibility in planning for or reacting to changes in our industry and market conditions;
•causing us to be more vulnerable in the event of a downturn in our business;
•exposing us to increased interest rate risk given that a portion of our debt obligations are at variable interest rates; and
•increasing our risk of a covenant violation under our Senior Credit Facility.
We may be required to contribute additional cash to meet our significant underfunded benefit obligations associated with defined benefit plans we manage.
We have frozen defined benefit pension plans for employees primarily in the U.S., the U.K. and Germany. At December 31, 2021, our defined benefit pension plans had an aggregate funding deficit (calculated as the excess of projected benefit obligations over the fair value of plan assets) of approximately $88 million, the majority of which is related to our defined benefit pension plan in the U.K. In the future, our pension deficits may increase or decrease depending on changes in the levels of interest rates, pension plan performance and other factors that may require us to make additional cash contributions to our pension plans and recognize further increases in our net pension cost to satisfy our funding requirements. If we are required or elect to make up all or a significant portion of the deficit for underfunded benefit plans, our financial position could be materially and adversely affected.
Our U.K. defined benefit pension plan has an aggregate funding deficit. Our U.K. pension plan has been frozen to new participants for a number of years, but can still have an aggregate funding deficit due to assumptions and factors noted below. For our frozen defined benefit pension plan in the U.K., the annual minimum funding requirements are based on a binding agreement with the plan trustees that is negotiated on a triennial basis. This agreement also includes other assurances and commitments regarding the business and assets that support the U.K. pension plan. It is possible that, following future valuations of our U.K. pension plan assets and liabilities or following future discussions with the trustees, the annual funding obligation will change. The future valuations under our U.K. pension plan can be affected by a number of assumptions and factors, including legislative changes, assumptions regarding interest rates, inflation, mortality and retirement rates, the investment strategy and performance of the plan assets and (in certain circumstance) actions by the U.K. pensions regulator. Adverse changes in the equity markets, interest rates or actuarial assumptions and legislative or other regulatory actions could increase the risk that the funding requirements increase following the next triennial negotiation. A significant increase in our funding requirements for our U.K. pension plan could result in a material adverse effect on our cash flows and financial position.
We are subject to foreign currency exchange risks that could adversely affect our results of operations and our ability to reinvest earnings from operations. Our ability to mitigate our foreign exchange risk through hedging transactions may be limited.
We generally attempt to denominate our contracts in U.S. dollars or in the currencies of our costs. However, we enter into contracts that subject us to currency risk exposure, primarily when our contract revenues are denominated in a currency different from the contract costs. A portion of our consolidated financial statementsrevenues and consolidated operating expenses are in Part II, Item 8foreign currencies. As a result, we are subject to foreign currency risks, including risks resulting from changes in currency exchange rates and limitations on our ability to reinvest earnings from operations in one country to fund the financing requirements of this Annual Reportour operations in other countries.
The governments of certain countries have or may in the future impose restrictive exchange controls on Form 10-K.local currencies and it may not be possible for us to engage in effective hedging transactions to mitigate the risks associated with fluctuations of a particular currency. We are often required to pay all or a portion of our costs associated with a project in the local currency. As a result, we generally attempt to negotiate contract terms with our customer, who is often affiliated with the local government, or has a significant local presence, to provide that we are only paid in the local currency for amounts that match
our local expenses. If we are unable to match our local currency costs with revenues in the local currency, we would be exposed to the risk of adverse changes in currency exchange rates.
Risks Related to GovernmentalOur Common Stock
If we need to sell or issue additional shares of common stock to refinance existing debt or to finance future acquisitions, our existing shareholder ownership could be diluted. In addition, the convertible note hedge and warrant transactions that we entered into in connection with the pricing of the Convertible Notes may affect the value of our common stock.
Part of our business strategy is to expand into new markets and enhance our position in existing markets, both domestically and internationally, which may include the acquisition and merging of complementary businesses. To successfully fund and complete such potential acquisitions, or to refinance our existing debt, we may issue additional equity securities that may result in dilution of our existing shareholder ownership's earnings per share.
In addition, in connection with the pricing of the Convertible Notes, we entered into convertible note hedge transactions with certain option counterparties. We also entered into warrant transactions with the option counterparties. The convertible note hedge transactions are generally expected to reduce potential dilution to our common stock upon any conversion of the Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Convertible Notes, as the case may be. However, the warrant transactions could separately have a dilutive effect to the extent that the market value per share of our common stock exceeds the strike price of the warrants at the time of exercise.
Provisions in our charter documents, Delaware law and our Senior Credit Facility may inhibit a takeover or impact operational control that could adversely affect the value of our common stock.
Our certificate of incorporation and bylaws, as well as Delaware corporate law, contain provisions that could delay or prevent a change of control or changes in our management that a stockholder might consider favorable. These provisions include, among others, prohibiting stockholder action by written consent, advance notice for making nominations at meetings of stockholders, providing for the state of Delaware as the exclusive forum for lawsuits concerning certain corporate matters and the issuance of preferred stock with rights that may be senior to those of our common stock without stockholder approval. These provisions would apply even if a takeover offer may be considered beneficial by some of our stockholders. If a change of control or change in management is delayed or prevented, the market price of our common stock could decline. Additionally, our Senior Credit Facility contains a default provision that is triggered upon a change in control of at least 25%, which would impede a takeover and/or make a takeover more costly.
We may change our dividend policy in the future.
We have maintained a regular cash dividend program since 2007. We anticipate continuing to pay quarterly dividends during 2022. However, any future payment of dividends, including the timing and amount of any such dividends, is at the discretion of our Board of Directors and may depend upon our earnings, liquidity, financial condition, alternate capital deployment opportunities or any other factors that our Board of Directors considers relevant. A change in our regular cash dividend program could have an adverse effect on the market price of our common stock.
Risks Related to Regulations and LawCompliance
We could be adversely impacted if we fail to comply with international export and domestic laws, which are rigorously enforced by the U.S. government.
To the extent that we export products, technical data and services outside of the U.S., we are subject to laws and regulations governing trade and exports, including, but not limited to, the International Traffic in Arms Regulations and the Export Administration Regulations, and trade sanctions against embargoed countries, which are administered by the Office of Foreign Asset Control within the Department of the Treasury. A failure to comply with these laws and regulations could result in civil or criminal sanctions, including the imposition of fines as well as the denial of export privileges and debarment from participation in U.S. government contracts. U.S. government contract violations could result in the imposition of civil and criminal penalties or sanctions, contract termination, forfeiture of profit or suspension of payment, any of which could result in losing our status as an eligible U.S. government contractor and cause us to suffer serious reputational harm, and which could have a material adverse effect on our business, financial condition or results of operations.
We are subject to anti-bribery laws in the U.S. and other jurisdictions, violations of which could includeresult in suspension or debarment of our ability to contract with the U.S. state or local governments, U.S. government agencies or the U.K. MoD, third-party claims, loss of customers, adverse financial impact, damage to reputation and adverse consequences on financing for current or future projects.
The FCPA, the U.K. Bribery Act and similar anti-bribery laws ("Anti-bribery Laws") in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these Anti-bribery Laws. We operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with Anti-bribery Laws may conflict with local customs and practices. We train our staff concerning Anti-bribery Laws and we also inform our partners, subcontractors, agents and other third parties who work for us or on our behalf that they must comply with the requirements of these Anti-bribery Laws. We also have procedures and controls in place to monitor internal and external compliance. We cannot provide complete assurance that our internal controls and procedures will always protect us from the reckless or criminal acts committed by our employees or third parties working on our behalf. If we are found to be liable for violations of these laws (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), we could suffer from criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.
Certain of our work sites are inherently dangerous and we are subject to various environmental and worker health and safety laws and regulations. If we fail to maintain safe work sites or to comply with these laws and regulations, we may suffer damage to our reputation and incur significant costs and penalties that could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Certain work sites often expose our employees and others to chemical and manufacturing processes, large pieces of mechanized equipment and moving vehicles. Additionally, our employees and others at certain project sites may be exposed to severe weather events or high security risks. Failure to implement effective safety procedures may result in injury, disability or loss of life to these parties. In addition, the projects may be delayed and we may be exposed to litigation or investigations.
Our operations are subject to a variety of environmental, worker health and safety laws and regulations governing the generation, management and use of regulated materials, the discharge of materials into the environment, the remediation of environmental contamination associated with the release of hazardous substances and human health and safety. Violations of these laws and regulations can cause significant delays and additional costs to a project. When we perform our services, our personnel and equipment may be exposed to radioactive and hazardous materials and conditions. We may be subject to claims alleging personal injury, property damage or natural resource damages by employees, customers and third parties as a result of alleged exposure to or contamination by hazardous substances. In addition, we may be subject to fines, penalties or other liabilities arising under environmental and employee safety laws. A claim, if not covered by insurance at all or only partially, could have a material adverse impact on our financial condition, results of operations and cash flows. In addition, more stringent regulation of our customers' operations with respect to the protection of the environment could also adversely affect their operations and reduce demand for our services.
Various U.S. federal, state and local as well as foreign environmental laws and regulations may impose liability for property damage and costs of investigation and cleanup of hazardous or toxic substances on property currently or previously owned by us or arising out of our waste management or environmental remediation activities. These laws may impose responsibility and liability without regard to knowledge or causation of the presence of contaminants. The liability under these laws may be joint and several. The ongoing costs of complying with existing environmental laws and regulations could be substantial and have a material adverse impact on our financial condition, results of operations and cash flows. Changes in the environmental laws and regulations, remediation obligations, enforcement actions, stricter interpretations of existing requirements, future discovery of contamination or claims for damages to persons, property, natural resources or the environment could result in material costs and liabilities that we currently do not anticipate.
Our effective tax rate and tax positions may vary.
We mayare subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining certain components of our worldwide provision for income taxes and a change in tax laws, treaties or regulations, or their interpretation, in any country in which we operate could result in higher taxes on our earnings, which could have a material impact on our earnings and cash flows from operations. In the ordinary course of our business, there are certain transactions and calculations where the ultimate tax determination is uncertain. We are audited by various U.S. and foreign tax authorities in the ordinary course of business, and our tax estimates and tax positions could be materially affected by market or regulatory responses to many factors including the final outcome of tax audits and related litigation, the introduction of new tax accounting standards, legislation, regulations and related interpretations, our global mix of earnings, the realizability of deferred tax assets and
changes in societal viewsuncertain tax positions. A significant increase in tax rates could have a material adverse effect on our profitability and liquidity.
Risks Related to Climate Change
There is a rapidly evolving awareness and focus from stakeholders, such as investors, customers and current and future employees, with respect to global climate change or otherand the related emphasis on environmental, matters.social and governance practices, which could affect our business.
Continued attention to issues concerning climate change or other environmental matters (e.g., the use of commodity plastics) may result in the imposition of additional environmental regulations that seek to restrict, or otherwise impose limitations or costs upon, the emission of greenhouse gases. International agreements, and national, regional and state legislation and regulatory measures or other restrictions on emissions of greenhouse gases could affect our clients, including those who are involved in the exploration, production or refining of fossil fuels and those who emit greenhouse gases through the combustion of fossil fuels, or emit greenhouse gases through the mining, manufacture,manufacturing or the utilization or production of materials or goods. Such legislation or restrictions could increase the costs of projects for us and our clients or, in some cases, prevent a project from going forward, thereby potentially reducing the need for our services that could in turn have a material adverse effect on our operations and financial condition. However, policy changes and climate legislation could also increase the overall demand for our services as our clients and partners work to comply with such policies, such as by decarbonizing their industries, transitioning from fossil fuels to renewable energy sources and developing integrated and sustainable solutions, which could have a positive impact on our business. We cannot predict when or whether any of these various legislative and regulatory proposals may become law or what their effect will be on us and our customers.
Risks RelatedFurthermore, investor and societal expectations with respect to Financial Conditionsenvironmental, social and Markets
Current or future economic conditionsgovernance matters have been rapidly evolving and increasing. We risk damage to our reputation if we do not act responsibly in the credit marketsfollowing key areas: inclusion and diversity, environmental stewardship, support for local communities and corporate governance and transparency. A failure to adequately meet stakeholders' expectations may negatively affect the abilityresult in loss of business, diluted market valuation, an inability to operate our attract and retain customers and talented personnel, increased negative investor sentiment toward us and/or our customers’ businesses, finance working capital, implement our acquisition strategycustomers and access our cash and short-term investments.
We finance our business using cash provided by operations, but also depend on the availabilitydiversion of credit, including letters of credit and surety bonds. Our abilityinvestment to obtain capital or financing on satisfactory terms will depend in part upon prevailing market conditions as well as our operating results. If adequate credit or funding is not available, or is not available on terms satisfactory to us, thereother industries, which could behave a material adverse effectnegative impact on our businessstock price and financial performance.our access to and costs of capital.
Disruptions of the capital markets could also adversely affect our clients’ ability to finance projectsClimate change and could result in contract cancellations or suspensions, project delays and payment delays or defaults by our clients. In addition, clients may be unable to fund new projects, may choose to make fewer capital expenditures or otherwise slow their spending on our services or
to seek contract terms more favorable to them. Our government clients may face budget deficits that prohibit them from funding proposed and existing projects or that cause them to exercise their right to terminate our contracts with little or no prior notice. Furthermore, any financial difficulties suffered by our subcontractors or suppliers could increase our cost or adversely impact project schedules. These disruptions could materially impact our backlog and financial performance.
In addition, we are subject to the risk that the counterparties to our Revolver and PLOC may be unable to meet their contractual obligations to us if they suffer catastrophic demands on their liquidity. We also routinely enter into contracts with counterparties, including vendors, suppliers and subcontractors that may be negatively affected by events in the capital markets. If those counterparties are unable to perform their obligations to us or our clients, we may be required to provide additional services or make alternate arrangements on less favorable terms with other parties to ensure adequate performance and delivery of service to our clients. These circumstances could also lead to disputes and litigation with our partners or clients, whichrelated environmental issues could have a material adverse effectimpact on our reputation, business, financial condition and results of operations.
Furthermore,Climate change related events, such as increased frequency and severity of storms, floods, wildfires, droughts, hurricanes, freezing conditions and other natural disasters, may have a long-term impact on our cash balances and short-term investments are maintained in accounts held at major banks and financial institutions located primarily in North America, the U.K. and Australia. Deposits are in amounts that exceed available insurance. Although none of the financial institutions in which we hold our cash and investments have gone into bankruptcy, been forced into receivership or have been seized by their governments, there is a risk that this may occur in the future. If this were to occur, we would be at risk of not being able to access our cash and investments, which may result in a temporary decrease in liquidity that could impede our ability to fund operations.
We may change our dividend policy in the future.
We have maintained a regular cash dividend program since 2007. We anticipate continuing to pay quarterly dividends during 2020. However, any future payment of dividends, including the timing and amount of any such dividends, is at the discretion of our Board of Directors and may depend upon our earnings, liquidity,business, financial condition alternate capital deployment opportunitiesand results of operations. Although we are proactively seeking measures to mitigate our business risks associated with climate change, we recognize that there are innate climate related risks regardless of where and how we conduct our businesses. As such, a potential disruption to our and our customer's businesses from a natural disaster may cause us to experience work stoppages, project delays, financial losses and additional costs to resume operations such as increased insurance costs or any other factors that our Boardloss of Directors considers relevant. A change in our regular cash dividend program could have an adverse effect on the market price of our common stock.coverage, legal liability and reputational damage.
We may be unable to obtain new contract awards if we are unableachieve our sustainability commitments and targets which could result in the loss of investors and customers and damage to provide our customers with letters of credit, surety bonds or other credit enhancements.reputation.
Customers may require us to provide credit enhancements, including letters of credit, bank guarantees or surety bonds. We are often requiredcontinuously committed to provide performance guaranteesadvancing our environmental, social and governance strategy as evidenced by the establishment and continued focus on delivering on our 2030 net-zero carbon ambitions after we achieved carbon neutrality in 2019. However, achievement of our sustainability commitments and targets is subject to customers to indemnify the customer should we fail to perform our obligations under the contract. Failure to provide the required credit enhancements on terms required by a customer may result in an inability to bid, win or comply with the contract. Historically, we have had adequate letters of credit capacity but such capacity beyond our Senior Credit Facility is generally at the provider’s sole discretion. Due to events that affect the bankingrisks and insurance markets generally, letters of credit or surety bonds may be difficult to obtain or may only be available at significant cost. Moreover, many projects are often very large and complex, which often necessitates the use of a joint venture, often with a market competitor, to bid on and perform the contract. Entering into joint ventures or partnerships exposes us to the credit and performance risk of third parties,uncertainties, many of whom may not be financially strong or may encounter financial difficulties. If our joint ventures or partners fail to perform, we may be required to complete the project activities. In addition, future projects may require us to obtain letters of credit that extend beyond the termwhich are outside of our Senior Credit Facility. Any inability to bid for or win new contracts due to the failure of obtaining adequate letters of credit, surety bonding or other customary credit enhancements could have a material adverse effect on our business prospectscontrol. These risks and future revenues.
Our Senior Credit Facility imposes restrictions that limit our operating flexibility and may result in additional expenses, and these facilities mayuncertainties include, but are not be available if financial covenants are violated or if an event of default occurs.
Our Senior Credit Facility includes a $500 million revolving credit facility and a $500 million performance letter of credit facility, both maturing in April 2023 (see Note 14 to our consolidated financial statements for discussion of subsequent events related to our Senior Credit Facility in 2020). It contains a number of covenants restricting, among other things,limited to: our ability to incur liensexecute our operational strategies and indebtedness, sell assets, repurchaseachieve our equity sharesgoals within the currently projected costs and make certain typesthe expected timeframes; the availability and cost of investments. Wealternative fuels, global electrical charging infrastructure, off-site renewable energy and other materials and components; unforeseen design, operational and technological difficulties; the outcome of research efforts and future technology developments, including the ability to scale projects and technologies on a commercially competitive basis such as carbon sequestration and/or other related processes; compliance with, and changes or additions to, global and regional regulations, taxes, charges, mandates or requirements relating to greenhouse gas emissions, carbon costs or climate-related goals; labor-related regulations and requirements that restrict or prohibit our ability to impose requirements on third party contractors; adapting products to customer preferences and customer acceptance of sustainable supply chain solutions; the actions of competitors and competitive pressures; an acquisition of or merger with another company that has not adopted similar carbon
negative goals or whose progress towards reaching its carbon negative goals is not as advanced as ours; and the pace of regional and global recovery from the COVID-19 pandemic.
Although we believe that our sustainability commitments and targets are also subject to certain financial covenants, including maintenance of a maximum consolidated leverage ratio and a consolidated interest coverage ratio as defined in the Senior Credit Facility agreement.
A breach of any covenant or our inability to comply with the required financial ratios could result in a default under our Senior Credit Facility, and we can provideachievable, there is no assurance that we will be able to obtainsuccessfully implement our strategies and achieve our 2030 targets. Investors have recently increased their focus on environmental, social and governance matters, including practices related to greenhouse gas emissions and climate change. Additionally, an increasing percentage of the necessary waivers or amendments from our lenders to remedy a default. In the eventinvestment community considers sustainability factors in making investment decisions, and an increasing number of any default not cured or waived, the lendersentities are not obligated to provide funding or issue letters of credit and could elect to require us to apply available cash to collateralize any outstanding letters of credit and
declare any outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable, thus requiring us to apply available cash to repay any borrowings then outstanding.considering sustainability factors in awarding business. If we are unable to cash collateralizemeet our letters of creditcommitments and targets and appropriately address sustainability enhancement, we may lose investors, customers or repay borrowings with respect topartners, our Senior Credit Facility when due, our lenders could proceed against the guarantees of our major domestic subsidiaries. If any future indebtedness under our Senior Credit Facility is accelerated, we can provide no assurance that our assets would be sufficient to repay such indebtedness in full.
Additionally, LIBOR and certain other interest "benchmarks"stock price may be subject to regulatory guidance or reform that could cause interest rates undernegatively impacted, our Senior Credit Facility, our current derivative contracts or future contracts not yet contemplated to perform differently than in the past or cause other unanticipated consequences. The U.K.'s Financial Conduct Authority, which regulates LIBOR, has announced that it intends to stop requiring banks to submit LIBOR rates after 2021 which will effectively end the usefulness of LIBOR and may end its publication. If LIBOR ceases to exist or if new methods of calculating LIBOR do not evolve, interest rates on our current or future debt obligationsreputation may be adverselynegatively affected and our available liquidity and cash flows couldit may be negatively impacted.
Our indebtedness and the associated covenants could materially adversely affect our abilitymore difficult for us to obtain additional financing, including for acquisitions and capital expenditures, limit our flexibility to manage our business, prevent us from fulfilling our financial obligations and restrict our usecompete effectively, all of capital.
We had approximately $1.2 billion of indebtedness outstanding as of December 31, 2019 under our Senior Credit Facility and Senior Notes which could have negative consequences to us, including, but not limited to:
requiring us to dedicate cash flow froman adverse effect on our business, results of operations toand financial condition, as well as on the repayment of debt, interest and other related amounts, which reduces the funds we have available for other purposes, such as working capital, capital expenditures, acquisitions, payment of dividends and share repurchase programs;
making it more difficult or expensive for us to obtain any necessary future financing for working capital, capital expenditures, debt service requirements, debt refinancing, acquisitions or other purposes;
reducing our flexibility in planning for or reacting to changes in our industry and market conditions;
causing us to be more vulnerable in the event of a downturn in our business;
exposing us to increased interest rate risk given that a portion of our debt obligations are at variable interest rates; and
increasing our risk of a covenant violation under our Senior Credit Facility.
Provisions in our charter documents, Delaware law and our Senior Credit Facility may inhibit a takeover or impact operational control that could adversely affect the valueprice of our common stock.
Our certificate of incorporation and bylaws, as well as Delaware corporate law, contain provisions that could delay or prevent a change of control or changes in our management that a stockholder might consider favorable. These provisions include, among others, prohibiting stockholder action by written consent, advance notice for making nominations at meetings of stockholders, providing for the state of Delaware as the exclusive forum for lawsuits concerning certain corporate matters and the issuance of preferred stock with rights that may be senior to those of our common stock without stockholder approval. These provisions would apply even if a takeover offer may be considered beneficial by some of our stockholders. If a change of control or change in management is delayed or prevented, the market price of our common stock could decline. Additionally, our Senior Credit Facility contains a default provision that is triggered upon a change in control of at least 25%, which would impede a takeover and/or make a takeover more costly.
We are subject to foreign exchange and currency risks that could adversely affect our operations and our ability to reinvest earnings from operations. Our ability to mitigate our foreign exchange risk through hedging transactions may be limited.
We generally attempt to denominate our contracts in U.S. Dollars or in the currencies of our costs. However, we enter into contracts that subject us to currency risk exposure, primarily when our contract revenues are denominated in a currency different from the contract costs. A portion of our consolidated revenues and consolidated operating expenses are in foreign currencies. As a result, we are subject to foreign currency risks, including risks resulting from changes in currency exchange rates and limitations on our ability to reinvest earnings from operations in one country to fund the financing requirements of our operations in other countries.
The governments of certain countries have or may in the future impose restrictive exchange controls on local currencies and it may not be possible for us to engage in effective hedging transactions to mitigate the risks associated with fluctuations of a particular currency. We are often required to pay all or a portion of our costs associated with a project in the local currency. As a result, we generally attempt to negotiate contract terms with our customer, who is often affiliated with the local government, or has a significant local presence, to provide that we are only paid in the local currency for amounts that match our local expenses. If we are unable to match our local currency costs with revenues in the local currency, we would be exposed to the risk of adverse changes in currency exchange rates.
If we need to sell or issue additional shares of common stock to refinance existing debt or to finance future acquisitions, our existing shareholder ownership could be diluted. In addition, the convertible note hedge and warrant transactions that we entered into in connection with the pricing of the Convertible Notes may affect the value of our common stock.
Part of our business strategy is to expand into new markets and enhance our position in existing markets, both domestically and internationally, which may include the acquisition and merging of complementary businesses. To successfully fund and complete such potential acquisitions, or to refinance our existing debt, we may issue additional equity securities that may result in dilution of our existing shareholder ownership's earnings per share.
In addition, in connection with the pricing of the Convertible Notes, we entered into convertible note hedge transactions with certain option counterparties. We also entered into warrant transactions with the option counterparties. The convertible note hedge transactions are generally expected to reduce potential dilution to our common stock upon any conversation of the Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Convertible Notes, as the case may be. However, the warrant transactions could separately have a dilutive effect to the extent that the market value per share of our common stock exceeds the strike price of the warrants at the time of exercise.
We make equity investments in privately financed projects in which we could sustain significant losses.
We participate in privately financed projects that enable governments and other customers to finance large-scale projects, such as the acquisition and maintenance of major military equipment, capital projects and service purchases. These projects typically include the facilitation of nonrecourse financing, the design and construction of facilities and the provision of operation and maintenance services for an agreed-upon period after the facilities have been completed. We may incur contractually reimbursable costs, and typically make investments prior to an entity achieving operational status or receiving project financing. If a project is unable to obtain financing, we could incur losses on our investments and any related contractual receivables. After completion of these projects, the return on our investments can be dependent on the operational success of the project and market factors that may not be under our control. As a result, we could sustain a loss on our equity investment in these projects.
We may be required to contribute additional cash to meet our significant underfunded benefit obligations associated with pension benefit plans we manage.
We have frozen defined benefit pension plans for employees primarily in the U.S., U.K., and Germany. At December 31, 2019, our defined benefit pension plans had an aggregate funding deficit (calculated as the excess of projected benefit obligations over the fair value of plan assets) of approximately $277 million, the majority of which is related to our defined benefit pension plan in the U.K. In the future, our pension deficits may increase or decrease depending on changes in the levels of interest rates, pension plan performance and other factors that may require us to make additional cash contributions to our pension plans and recognize further increases in our net pension cost to satisfy our funding requirements. If we are required or elect to make up all or a significant portion of the deficit for underfunded benefit plans, our financial position could be materially and adversely affected.
Our U.K. defined benefit pension plan has an aggregate funding deficit. Our U.K. pension plan has been frozen to new participants for a number of years, but can still have an aggregate funding deficit due to assumptions and factors noted below. For our frozen defined benefit pension plan in the U.K., the annual minimum funding requirements are based on a binding agreement with the plan trustees that is negotiated on a triennial basis. This agreement also includes other assurances and commitments regarding the business and assets that support the U.K. pension plan. It is possible that, following future valuations of our U.K. pension plan assets and liabilities or following future discussions with the trustees, the annual funding obligation will change. The future valuations under our U.K. pension plan can be affected by a number of assumptions and factors, including legislative changes, assumptions regarding interest rates, inflation, mortality, compensation increases and retirement rates, the investment strategy and performance of the plan assets, and (in certain circumstance) actions by the U.K. pensions regulator. Adverse changes in the equity markets, interest rates, or changes in actuarial assumptions and legislative or other regulatory actions could increase the risk that the funding requirements increase following the next triennial negotiation. A significant increase in our funding requirements for our U.K. pension plan could result in a material adverse effect on our cash flows and financial position.
Item 1B. Unresolved Staff Comments
None.
Item 2.Properties
Our operations are conducted at both owned and leased properties in domestic and foreign locations. Our corporate headquarters are located at 601 Jefferson Street, Houston, Texas.Texas 77002. While we have operations worldwide, the following table describes the locations of our more significant existing office facilities:
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Location | | Owned/Leased | | | | Business Segment |
North America: | | | | | | |
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Location | | Owned/Leased | | Business Segment |
North America:Houston, Texas | | Leased | | | | All |
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Houston,Webster, Texas | | Leased | | All | | Government Solutions |
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Columbia,Fulton, Maryland | | Leased | | | | Government Solutions |
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Greenbelt,Columbia, Maryland | | Leased | | | | Government Solutions |
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Lexington Park, Maryland | | Leased | | | | Government Solutions |
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Ann Arbor, MI | | Leased | | | | Government Solutions |
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Chantilly, Virginia | | Leased | | | | Government Solutions |
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Vienna, Virginia | | Leased | | | | Government Solutions |
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Fairfax, Virginia | | Leased | | | | Government Solutions |
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Dayton/Beavercreek, Ohio | | Leased | | | | Government Solutions |
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Huntsville, Alabama | | Leased | | | | Government Solutions |
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Colorado Springs, ColoradoPhoenix, Arizona | | Leased | | | | Government Solutions |
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Birmingham, Alabama | | Leased | | Energy Solutions | | |
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Newark, Delaware | | Leased | | Energy Solutions |
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Monterrey, Nuevo Leon, Mexico | | Leased | | Energy Solutions |
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Europe, Middle East and Africa: | | | | | | |
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Leatherhead, United Kingdom | | Owned | | | | All |
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Bristol, United Kingdom | | Leased | | | | Government Solutions |
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Glasgow, United Kingdom | | Leased | | | | Government Solutions |
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Wiltshire, United Kingdom | | Leased / Owned | | | | Government Solutions |
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Al Khobar, Saudi Arabia | | Leased | | Energy | | Sustainable Technology Solutions |
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Asia-Pacific:Manama, Bahrain | | Leased | | | | All |
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Chennai, IndiaAsia-Pacific: | | Leased | | All | | |
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Chennai, India | | Leased | | | | All |
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Majura Park, Australia | | Leased | | | | Government Solutions |
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Delhi (Gurgaon), India | | Leased | | | | Sustainable Technology Solutions |
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Perth, Australia | | Leased | | Energy Solutions | | |
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Brisbane,Perth, Australia | | Leased | | Energy | | Government Solutions |
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Sydney,Brisbane, Australia | | Leased | | Energy | | Government Solutions |
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Melbourne, Australia | | Leased | | Energy | | Government Solutions |
We also own or lease numerous small facilities that include sales, administrative and offices as well as warehouses and equipment yards located throughout the world. Our owned Leatherhead property is pledged to secure certain pension obligations in the U.K. and we believe all properties that we currently occupy are suitable for their intended use.
Item 3.Legal Proceedings
Information relating to various commitments and contingencies is described in “Item 1A. Risk Factors” contained in Part I of this Annual Report on Form 10-K and in Notes 166, 14 and 1715 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part I, Item 3.
Item 4.Mine Safety Disclosures
Not applicable.
PART II
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Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the NYSE and trades under the symbol “KBR.” On February 20, 2020, our Board of DirectorsWe have declared a regulardividend in each quarter during the years ended December 31, 2021 and 2020, and we currently expect that comparable quarterly cash dividenddividends will continue to be paid for the foreseeable future. The declaration, payment and amount of $0.10 per common share. Future dividend declarationsfuture cash dividends will be at the discretion of our Board of Directors. On February 18, 2022, the Board of Directors declared a dividend of $0.12 per share, which will be paid on April 15, 2022.
At January 31, 2020,2022, there were 7667 shareholders of record. In calculating the number of shareholders, we consider clearing agencies and security position listings as one shareholder for each agency or listing.
Share Repurchases
On February 25, 2014, ourthe Board of Directors authorized a $350 million share repurchase program. As of December 31, 2019, $160 million remained available under this authorization. On February 19, 2020, the Board of Directors authorized an increase of approximately $190 million to our share repurchase program, returning the authorization level to $350 million. As of December 31, 2021, $225 million remains available for repurchase under this authorization. The authorization does not obligate the Company to acquire any particular number of shares of common stock and may be commenced, suspended or discontinued without prior notice. The share repurchases are intended to be funded through the Company’s current and future cash flows and the authorization does not have an expiration date.
The following is a summary of share repurchases of our common stock settled during the three months ended December 31, 2019,2021, and the amount available to be repurchased under the authorized share repurchase program:
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Purchase Period | Shares Repurchased (1) | | Average Price Paid per Share | |
Shares Repurchased as Part of Publicly Announced Plan | | Dollar Value of Maximum Number of Shares that May Yet Be Purchased Under the Plan |
October 1 - 31, 2019 | 1,820 |
| | $ | 24.02 |
| | — |
| | $ | 160,236,157 |
|
November 1 - 30, 2019 | 1,888 |
| | $ | 29.43 |
| | — |
| | $ | 160,236,157 |
|
December 1 - 31, 2019 | 14 |
| | $ | 30.65 |
| | — |
| | $ | 160,236,157 |
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| | | | | | | | | | | | | | | | | | | | | | | |
Purchase Period | Total Shares Repurchased (1) | | Average Price Paid per Share | | Shares Repurchased as Part of Publicly Announced Plan | | Dollar Value of Maximum Number of Shares that May Yet Be Purchased Under the Plan |
October 1 - 31, 2021 | — | | | $ | — | | | — | | | $ | 250,299,457 | |
November 1 - 30, 2021 | 480,385 | | | $ | 45.81 | | | 479,600 | | | $ | 228,330,004 | |
December 1 - 31, 2021 | 69,339 | | | $ | 45.55 | | | 66,286 | | | $ | 225,310,393 | |
Total | 549,724 | | | $ | — | | | 545,886 | | | $ | 225,310,393 | |
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(1) | The shares reported herein consist solely of shares acquired from employees in connection with the settlement of income tax and related benefit withholding obligations arising from issuance of share-based equity awards under the KBR Stock and Incentive Plan. A total of 3,722 shares were acquired from employees during the three months ended December 31, 2019, at an average price of $26.79 per share. |
(1)Included within the shares repurchased herein are 3,838 shares acquired from employees in connection with the settlement of income tax and related benefit withholding obligations arising from issuance of share-based equity awards under the KBR Stock and Incentive Plan at an average price of $44.76 per share.
Performance Graph
The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall the information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing.
The following performance graph compares the cumulative total shareholder return on shares of our common stock for the five-year period ended December 31, 2019,2021, with the cumulative total return on the Dow Jones Heavy Construction Industry Index, the Russell 1000 Index, the Russell 2000 Index and the S&P 1500 IT Consulting & Other Services Index, the Russell 2000 Index, the S&P MidCap 400 Index and the Dow Jones Heavy Construction Industry Index for the same period. The comparisons assume the investment of $100 on December 31, 20142016 and reinvestment of all dividends. The shareholder return is not necessarily indicative of future performance.
In our Annual Report on Form 10-K for theThis year ended December 31, 2018, we included the Russell 1000 and Dow Jones Heavy Construction Industry Index as additional indices for the performance graph. As a result of the shift in consolidated results towards our GS segment, we believe the addition ofadded the S&P 1500 IT Consulting & Other ServicesMidCap 400 Index provides a balanced view of theto our performance of our business. Additionally,graph as KBR’s stock is now included as a constituent of the Russell 2000 Index, we believe it is a better independent broadwidely used market capitalization index because it measures the performancethat we believe appropriately represents companies of similar mid-sized companies in numerous sectors. As required by SEC regulations, the chart below includes the Russell 1000 Index, but we do not plancomparable size to include the comparison to this index in future filings.that of KBR.
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| 12/31/2016 | | 12/31/2017 | | 12/31/2018 | | 12/31/2019 | | 12/31/2020 | | 12/31/2021 |
KBR | $ | 100.00 | | | $ | 121.18 | | | $ | 94.47 | | | $ | 192.37 | | | $ | 198.45 | | | $ | 308.92 | |
S&P 1500 IT Consulting & Other Services | $ | 100.00 | | | $ | 111.69 | | | $ | 93.13 | | | $ | 118.35 | | | $ | 130.85 | | | $ | 176.63 | |
Russell 2000 | $ | 100.00 | | | $ | 113.14 | | | $ | 99.37 | | | $ | 122.94 | | | $ | 145.52 | | | $ | 165.45 | |
S&P MidCap 400 | $ | 100.00 | | | $ | 114.45 | | | $ | 100.15 | | | $ | 124.23 | | | $ | 138.90 | | | $ | 171.15 | |
Dow Jones Heavy Construction | $ | 100.00 | | | $ | 104.50 | | | $ | 76.67 | | | $ | 102.11 | | | $ | 123.25 | | | $ | 184.05 | |
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| | | | | | | | | | | | | | | | | | | | | | | |
| 12/31/2014 | | 12/31/2015 | | 12/30/2016 | | 12/31/2017 | | 12/31/2018 | | 12/31/2019 |
KBR | $ | 100.00 |
| | $ | 101.70 |
| | $ | 102.44 |
| | $ | 124.14 |
| | $ | 96.78 |
| | $ | 197.07 |
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S&P 1500 IT Consulting & Other Services | $ | 100.00 |
| | $ | 97.05 |
| | $ | 112.10 |
| | $ | 125.20 |
| | $ | 104.40 |
| | $ | 132.67 |
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Russell 2000 | $ | 100.00 |
| | $ | 94.29 |
| | $ | 112.65 |
| | $ | 127.46 |
| | $ | 111.94 |
| | $ | 138.50 |
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Dow Jones Heavy Construction | $ | 100.00 |
| | $ | 74.09 |
| | $ | 65.12 |
| | $ | 79.74 |
| | $ | 83.33 |
| | $ | 61.14 |
|
Russell 1000 | $ | 100.00 |
| | $ | 98.91 |
| | $ | 108.50 |
| | $ | 129.49 |
| | $ | 120.96 |
| | $ | 155.91 |
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Item 6.Selected Financial Data[Reserved]
The following table presents selected financial data for the last five years and should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II of this Annual Report on Form 10-K and the consolidated financial statements and the related notes to the consolidated financial statements included in Part II, Item 8 in this Annual Report on Form 10-K. |
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| | Years Ended December 31, |
Dollars in millions, except per share amounts | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Statements of Operations Data: | | | | | | | | | | |
Revenues (a) (d) | | $ | 5,639 |
| | $ | 4,913 |
| | $ | 4,171 |
| | $ | 4,268 |
| | $ | 5,096 |
|
Gross profit (e) | | 653 |
| | 584 |
| | 439 |
| | 198 |
| | 431 |
|
Equity in earnings of unconsolidated affiliates (g) | | 35 |
| | 79 |
| | 70 |
| | 82 |
| | 134 |
|
Asset impairments and restructuring charges | | — |
| | — |
| | (6 | ) | | (39 | ) | | (70 | ) |
Operating income (b) (g) | | 362 |
| | 468 |
| | 264 |
| | 19 |
| | 295 |
|
Net income (loss) (c) (g) | | 209 |
| | 310 |
| | 440 |
| | (60 | ) | | 210 |
|
Net income attributable to noncontrolling interests | | (7 | ) | | (29 | ) | | (8 | ) | | (10 | ) | | (23 | ) |
Net income (loss) attributable to KBR (c) (g) | | 202 |
| | 281 |
| | 432 |
| | (70 | ) | | 187 |
|
Basic net income (loss) attributable to KBR per share (g) | | $ | 1.42 |
| | $ | 1.99 |
| | $ | 3.05 |
| | $ | (0.49 | ) | | $ | 1.29 |
|
Diluted net income (loss) attributable to KBR per share (g) | | $ | 1.41 |
| | $ | 1.99 |
| | $ | 3.05 |
| | $ | (0.49 | ) | | $ | 1.29 |
|
Cash dividends declared per share | | $ | 0.32 |
| | $ | 0.32 |
| | $ | 0.32 |
| | $ | 0.32 |
| | $ | 0.32 |
|
| | | | | | | | | | |
Balance Sheet Data (as of the end of period): | | | | | | | | | | |
Total assets (f) (g) | | $ | 5,364 |
| | $ | 5,052 |
| | $ | 3,652 |
| | $ | 4,124 |
| | $ | 3,401 |
|
Long-term nonrecourse project-finance debt | | 7 |
| | 17 |
| | 28 |
| | 34 |
| | 51 |
|
Long-term debt | | 1,183 |
| | 1,226 |
| | 470 |
| | 650 |
| | — |
|
Total shareholders’ equity (f) (g) | | $ | 1,857 |
| | $ | 1,718 |
| | $ | 1,197 |
| | $ | 725 |
| | $ | 1,041 |
|
| | | | | | | | | | |
Other Financial Data (as of the end of period): | | | | | | | | | | |
Backlog | | $ | 14,636 |
| | $ | 13,497 |
| | $ | 10,570 |
| | $ | 10,938 |
| | $ | 12,333 |
|
| | | | | | | | | | |
| |
(a) | Includes revenues related to the consolidation of the Aspire Defence contracting entities in January 2018 and the acquisition of SGT in April 2018 totaling $1.0 billion and $875 million for the years ended 2019 and 2018, respectively. See Note 4 to our consolidated financial statements. |
| |
(b) | Includes gain on consolidation of the Aspire subcontracting entities of $108 million for the year ended 2018. See Note 4 to our consolidated financial statements.
|
| |
(c) | Net income and Net income attributable to KBR in the fourth quarter of 2017 were favorably impacted by a release of a valuation allowance of $223 million and an $17 million favorable impact related to the Tax Act. See Note 15 to our consolidated financial statements. |
| |
(d) | Effective January 1, 2018, we adopted ASC Topic 606. For all periods ending prior to January 1, 2018, revenues were recognized under the guidance of ASC Topic 605. See Note 1 to our consolidated financial statements.
|
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(e) | Effective January 1, 2019, we reclassified $128 million, $97 million, $86 million, and $106 million from "Cost of revenues" to "Selling, general and administrative expenses" for the years ended 2018, 2017, 2016 and 2015, respectively, to report in the same manner as such costs are defined in our disclosure statements under CAS for U.S. government reporting. See Note 1 to our consolidated financial statements. |
| |
(f) | The impact of adopting ASU No. 2016-02, Leases (Topic 842) resulted in an increase in total assets of $177 million and an increase in total shareholders' equity of $21 million at January 1, 2019. See Note 1 to our consolidated financial statements. |
| |
(g) | Includes the correction of immaterial errors related to the historical recognition of equity earnings associated with our interest in an unconsolidated joint venture. The impact on our consolidated statements of operations for the years ended 2018, 2017, and 2016 and consolidated balance sheets for the years ended 2018 and 2017 was disclosed in financial |
statements issued as of June 30, 2019. The year ended 2015 reflects a decrease of $15 million in "Equity in earnings of unconsolidated affiliates". Total assets and total shareholders' equity decreased $20 million and $11 million for the years ended 2016 and 2015, respectively.
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The purpose of the MD&A is to provide our stockholders and other interested parties with information necessary to gain an understanding of our financial condition and disclose changes in our financial condition since the most recent fiscal year-end and results of operations during the current fiscal period as compared to the corresponding period of the preceding fiscal year. The MD&A should be read in conjunction with Part I of this Annual Report on Form 10-K as well as the consolidated financial statements and related notes included in Part II, Item 8 inof this Annual Report on Form 10-K.
This MD&A does not address certain items
Overview
KBR Inc., a Delaware corporation, delivers science, technology and engineering solutions to governments and companies around the world. Drawing from its rich 100-year history and culture of innovation and mission focus, KBR creates sustainable value by combining deep domain expertise with its full life cycle capabilities to help clients meet their most pressing challenges. Our capabilities and offerings include the following:
•Scientific research such as quantum science and computing; health and human performance; materials science; life science research; and earth sciences;
•Defense systems engineering such as rapid prototyping; test and evaluation; aerospace acquisition support; systems and platform integration; and sustainment engineering;
•Operational support such as space domain awareness; C4ISR; human spaceflight and satellite operations; integrated supply chain and logistics; and military aviation support;
•Information operations such as cyber analytics and cybersecurity; data analytics; mission planning systems; virtual/augmented reality and technical training; artificial intelligence and machine learning; and
•Technology such as proprietary, sustainability-focused process licensing; advisory services focused on energy transition; and digitally-enabled asset optimization solutions.
KBR's strategic growth vectors include:
•Defense modernization;
•Space superiority;
•Health and human performance; and
•Sustainable technology.
Key customers include U.S. DoD agencies such as the U.S. Army, U.S. Navy and U.S. Air Force, Missile Defense Agency, National Geospatial-Intelligence Agency, National Reconnaissance Office and other intelligence agencies; U.S. civilian agencies such as NASA, U.S. Geological Survey and National Oceanic and Atmospheric Administration; the U.K. Ministry of Defence, London Metropolitan Police, and other U.K. Crown Services; the Royal Australian Air Force, Navy and Army; other national governments; and a wide range of commercial and industrial companies.
Our deployment priorities are to fund organic growth, maintain responsible leverage, maintain an attractive dividend, make strategic, accretive acquisitions and repurchase shares. Our acquisition thesis is centered around moving upmarket, expanding capabilities and broadening customer sets across strategic growth vectors. KBR also develops and prioritizes investment in respecttechnologies that are disruptive, innovative and sustainability- and safety-focused. These technologies and solutions enable clients to achieve a cleaner, greener, more energy efficient global future.
On October 1, 2020, we acquired Centauri, a provider of high-end engineering and development solutions for critical, well-funded, national security missions associated with space, intelligence, cyber and emerging technologies such as directed energy and missile defense. Additional information relating to the year ended December 31, 2017Centauri acquisition is described in reliance on amendmentsNote 4 to disclosure requirements adopted byour consolidated financial statements.
On October 20, 2021, we acquired Frazer-Nash Consultancy Limited ("Frazer-Nash"), a leading provider of high-end systems engineering, assurance and technology advisory services used to solve complex challenges. Frazer-Nash provides a broad range of professional advisory services across the SECdefense, renewable energy and critical infrastructure sectors primarily in 2019. A discussionthe U.K. and analysisAustralia. Additional information relating to the Frazer-Nash acquisition is described in Part II of such period may be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of ourthis Annual Report on Form 10-K for thein Note 4 to our consolidated financial statements.
Business Environment and Trends
Government Outlook
The proposed fiscal year ended December 31, 2018, filed with the SEC on February 26, 2019.
Overview
Our business portfolio includes full life-cycle professional services, project solutions and technologies delivered across two primary verticals, government and hydrocarbons, aligned with the following:
Early Project Advisory
Project Definition
Project Delivery
Operations & Maintenance
Our government services business is generally conducted in our GS business segment, and our hydrocarbons business is generally conducted in our TS and ES business segments.
Our capabilities and offerings include feasibility and solutions development; technical consulting; research and development; highly specialized mission support; systems acquisition, integration, engineering and design services; global logistics services; process technologies, proprietary equipment and catalysts; program management, construction, commissioning and startup services; asset operations and maintenance services; and engineering, procurement and construction services for large-scale, complex projects. We strive to deliver high quality solutions and services to support our clients' success today and to help them strengthen their strategic position for the future.
Government Market Overview
In December 2019, the fiscal year 20202022 U.S. defense spending budget was signed into law authorizing $738 billion of funding. The budget funds a national security strategy that continues the restoration of military readiness,prioritizes and furthers a national security strategy to confront Russia, China and othernear peer threats around the world, enhances the DoD’s cybersecurity strategy and cyber warfare capabilities, establishesincreases the U.S. Space Force under the U.S. Air Force, andpriority of military space superiority, directs innovation to meet long-range emerging threats.threats and continues the restoration of military readiness. The budget includes a number of measures to strengthen emerging technologies including cyber-science and technologies, artificial intelligence, hypersonic capabilities,directed energy, hypersonics and emerging biotechnologies. The National Defense Authorization Act for fiscal year 2022 reflects a 5% increase in defense spending over last year's enacted budget and represents an increase from the president's requested amount. The unapproved fiscal 2022 non-defense discretionary spending proposal includes a 16% increase in funding, including a 6.5% increase in funding for NASA to support the continuation of scientific research and exploration as well as increased funding across all agencies to tackle climate change. However, as the U.S. Government has not yet enacted an annual budget for fiscal year 2022, these proposed amounts are subject to change. To avert a government shutdown, a series of continuing resolution funding measures have been enacted to finance all U.S. Government activities through March 11, 2022. Under the continuing resolution, partial-year funding at amounts consistent with appropriated levels for fiscal year 2021 are available, subject to certain restrictions, but new spending initiatives are not authorized. Importantly, our key programs continue to be supported and funded despite the continuing resolution financing mechanism. In the coming months, Congress will need to approve or revise President Biden’s fiscal year 2022 budget proposal through enactment of appropriations bills and other policy legislation, which would then require final approval from President Biden to become law and complete the budget process. Additionally, on December 16, 2021, President Biden signed legislation increasing the federal debt limit by $2.5 trillion. The measure increases the debt limit to $31.4 trillion from the previous level of $28.9 trillion and is estimated to provide sufficient government borrowing capacity to last until early 2023.
In early 2021, the U.S. announced a full withdrawal of U.S. forces from Afghanistan. In connection with Operation Allies Welcome ("OAW"), KBR has been engaged by the U.S. DoD to provide humanitarian support across numerous military bases to those awaiting resettlement. Such support includes temporary housing, food service, medical care and other services. We expect this non-recurring OAW support to be substantially completed in early 2022.
Internationally, our government servicesGovernment Solutions work is performed primarily for the U.K. Ministry of Defence and the Australian Department of Defence. A significant majorityThe U.K. government has committed a 14% increase in defense spending over the coming four years. Recognizing the importance of our work instrong defense and the role the U.K. is contracted through long-term private financed initiatives that are expectedplays across the globe, the U.K. has prioritized investment in military research and investment in key areas to provide stable, predictable earningsadvance and cash flow over the program life. Our largest PFI extends through 2041.develop capabilities around artificial intelligence, cyber security and space superiority. The Australian government continues to increaseinvest in defense spending, in line with its commitment to increase defense budgets to 2% of GDP by 2020-21, with particular focus on enhancing regional security, buildingmodernizing defense capabilities, and strengthening cyber defenses.defenses and promoting broader economic stability.
In November 2021, we announced that HomeSafe Alliance LLC (“HomeSafe”), a KBR led joint venture with Tier One Relocation, was awarded the global household goods contract by U.S. Transportation Command. The contract ceiling value is $20 billion with a potential 9-year term, inclusive of all options periods. HomeSafe is expected to be the exclusive household goods move management service provider for the U.S. Armed Forces, Department of Defense civilians and their families. Under this contract, HomeSafe plans to modernize and infuse technology to improve the domestic and international relocation experience for all military personnel and their families. The contract award is currently under protest.
With increased defense and space spendingcivil budgets driven in part by political instability, military conflicts, aging platforms and infrastructure and the need for technology upgrades,advances, we expect continued opportunities to provide enabling solutions and technologies to high impact, mission critical work. These opportunitieswork aligned with our customers’ and our nation’s critical priorities.
Sustainable Technology Outlook
Long-range commercial market fundamentals are supported by global population growth and acceleration of demand for energy transition and renewable energy sources for which momentum continues to build. Clients continue to drive best value selectionsprioritize investment in digital solutions to increase end-product flexibility and customer confidenceenergy efficiency and to reduce their environmental footprint. As companies continue to commit to near-term carbon neutrality and longer-range net-zero carbon emissions, we expect spending to continue in the enterprise that we have built through our strategic acquisitionsareas such as decarbonization; carbon capture, utilization and organic growth.
Hydrocarbons Market Overview
In the hydrocarbons market, demand for our technologies, solutionssequestration; biofuels; and services is highly correlated to the level of capital and operating expenditures of our customers and prevailing market conditions. Recent volatility in commodity prices has resulted in many hydrocarbonscircular economy. Further, leading companies taking steps to defer or suspend capital expenditures, resulting in delayed or reduced volumes of business across the sector. Robust 2019 bookingsworld are proactively evaluating clean energy alternatives, including hydrogen and our large proportiongreen ammonia which complements KBR's proprietary process technology and capabilities.
We expect climate change and energy transition to continue to be areas of O&M funded services will provide stability during this period of market softness.From conceptual development studiespriority and investment as many countries, including the U.S., look to project deliveryboost their economies and asset management services, we seek to collaborate with our customers to meet the demandsinvest in a cleaner future. In advance of the global economy.Conference of the Parties 26 meeting in Scotland, the White House released details on its strategy to achieve greenhouse gas emission reduction targets as part of their agenda. On November 15, 2021, President Biden signed the bi-partisan Infrastructure Investment and Jobs Act bill into law which includes climate provisions focused on transportation and resiliency.
Our Business
Overall, we believe we have a balanced portfolio of global professional services, program delivery and technologies across the government services and hydrocarbons markets. We believe our increased mix of recurring government services and hydrocarbons services offers stability and predictability that enables us to be highly selective and disciplined in our pursuit of EPC projects across hydrocarbons market sectors.
OurKBR's business is organized into threetwo core business segments and twoone non-core business segments supporting the government services and hydrocarbons marketssegment as follows:
Core business segments
•Government Solutions
•Sustainable Technology Solutions
Energy Solutions
Non-core business segmentssegment
•Other
Non-strategic Business
Other
See additional information on our business segments, including detail with respect to changes to our reportable segments, that became effective for the quarter ended September 30, 2019, in NotesNote 1 and 2 to our consolidated financial statements and under "Item 1. Business" in this Annual Report on Form 10-K.
Overview of 2021 Financial Results and Significant Bookings
2021 was a year of significant achievement for KBR as we continued to execute toward our long-term vision. The Company benefits from a significant base of long-term enduring contracts in our government business, a diverse portfolio of high quality proprietary process technologies, market tailwinds that benefit our capabilities and technologies in areas such as defense modernization and energy transition and a truly global client base. Together, these attributes distinguish KBR and have contributed directly to the company’s growth in revenue and profit during the year. While the historic humanitarian efforts in connection with OAW amplified revenue and profit, the core business in GS delivered strong financial results in 2019 with each operating segment contributing across our key financial metrics: revenueorganic growth operating income, operatingduring the year, and STS delivered significantly increased 2021 earnings growth. Our teams continued to deliver operational performance, healthy profitability and strong cash flowflow. Importantly, we drove innovation and bookings. Consolidated 2019 revenue growth of 15% was comprised of 14% from Government Solutions, 26% from Technology Solutions and 16% from Energy Solutions. We expandedextended our footprint through many new project program wins and technology advances and development. We continued our track record of innovation, bringing new technologies to market and advising, consulting and delivering expertise in the vital area of energy transition, hydrogen future and plastics circular economy. We progressed in our strategic journey to advance upmarket to deliver innovative, digitally-enabled solutions by completing the Frazer-Nash acquisition. We also obtained a full and final resolution with the client on the Ichthys LNG project regarding material outstanding claims and disputes and we intend to pursue recovery from the consortium of subcontractors of the Combined Cycle Power Plant.
Bookings to underpin the future were strong in our GS and STS businesses. Our GS business landed $6.7 billion in bookings and options, including a $127 million recompete award from the U.S. DoD PreservationDepartment of theTransportation Volpe Center to modernize technical and safety-related transportation systems; a $539 million U.S. Air Force & Family program, the NASA Launch Range Operations Contract for Wallops Flight Facility,award to support rapid prototyping and several cost-reimbursable EPCfielding of systems; a $195 million U.S. Air Force award to provide trusted microelectronics solutions; and more. Our STS business landed $1.1 billion in bookings, including numerous projects in our Energy Solutions business. Our U.S. Government Solutions business posted a recompete win rate above 95% that included the 8-year Marine Corps preposition stock program, the 5-year NAVAIR Aircrew Services Contract, and three areas under the 10-year LOGCAP V program, which is currently under protest. Strong organic growth in Technology Solutions was attributable to increasing demand for our innovative solutions across the chemical, petrochemicalammonia landscape, including traditional, blue and refining markets as well as increased bundling of technologygreen ammonia, and multiple Hydro-PRT licenses with ancillary services, proprietary equipment and catalyst. Our acquisition of SGT in April 2018 also contributed to our 2019 growth.
studies.
Results of Operations
The following tables set forth our results of operations for the periods presented, including by segment. A discussion regarding our financial condition and results of operations for the years ended December 31, 2020 and 2019 is included in Item 7. of Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Current Report on Form 8-K, which was filed with the SEC on July 29, 2021. This Current Report on Form 8-K was filed to reflect changes to the presentation of our financial information as set forth in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on February 25, 2021, effective January 1, 2021, in order to give effect to a change in our segment reporting.
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Revenues |
| | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
Dollars in millions | 2021 | | 2020 | | $ | | % | | 2019 | | $ | | % |
Revenues | $ | 7,339 | | | $ | 5,767 | | | $ | 1,572 | | | 27 | % | | $ | 5,639 | | | $ | 128 | | | 2 | % |
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Revenues |
| | | | | 2019 vs. 2018 | | | | 2018 vs. 2017 |
Dollars in millions | 2019 | | 2018 | | $ | | % | | 2017 | | $ | | % |
Revenues | $ | 5,639 |
| | $ | 4,913 |
| | $ | 726 |
| | 15 | % | | $ | 4,171 |
| | $ | 742 |
| | 18 | % |
2019 vs. 2018
Revenues increased by $1.6 billion, or 27%, to $7.3 billion in 2021, compared to $5.8 billion in 2020. The increase in consolidated revenues in 2019 was primarily driven by theour GS business segment attributable to continued strong organic growth withinin our GS logisticsbusiness units, including the OAW program which contributed $1.6 billion in 2021, and engineering businesses primarily on U.S. government contracts as well as increased revenuesthe acquisitions of Centauri in October 2020 and Frazer-Nash in October 2021. This growth was partially offset by a reduction in revenue in our STS business segment following the Company's exit from SGT acquiredcommoditized construction services in April 2018. New services2020 and consulting awardsreduced activity in our GS business segment due to reduced activity in the Middle East fromand lower volume associated with the successful completion of non-recurring construction work on our ES business segment and higher proprietary equipment sales volume from our TS business segment also contributed significantly to consolidated revenue growth in 2019.Aspire program.
2018 vs. 2017
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Gross Profit |
| | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
Dollars in millions | 2021 | | 2020 | | $ | | % | | 2019 | | $ | | % |
Gross profit | $ | 806 | | | $ | 666 | | | $ | 140 | | | 21 | % | | $ | 653 | | | $ | 13 | | | 2 | % |
The $140 million increase in consolidated revenues in 2018gross profit was primarily driven by strongimprovements in our STS business segment due to improved execution and market recovery in 2021, legacy provisions recognized in 2020 that did not recur in 2021 and the net favorable resolution of and provisioning for legacy matters in 2021. Gross profits also increased in our GS business segment that were driven by organic growth, within our GS logistics and engineering services business areas, the consolidationincluding activity of the Aspire Defence subcontracting entitiesOAW program, and acquisitionthe acquisitions of SGT (as discussedCentauri in Note 4 to our consolidated financial statements),October 2020 and increased revenues from our TS segment.Frazer-Nash in in October 2021. The increase was partially offset by decreased revenue in our ES segment caused byhigher amortization of intangibles from the Centauri and Frazer-Nash acquisitions and reduced activity and the completion or near completion of several projects in the U.S. and Canada, the non-recurrence of $35 million in revenue from the PEMEX settlement that occurred in 2017, and decreased revenues in our Non-strategic Business segment as we exit those businesses.
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Gross Profit |
| | | | | 2019 vs. 2018 | | | | 2018 vs. 2017 |
Dollars in millions | 2019 | | 2018 | | $ | | % | | 2017 | | $ | | % |
Gross profit | $ | 653 |
| | $ | 584 |
| | $ | 69 |
| | 12 | % | | $ | 439 |
| | $ | 145 |
| | 33 | % |
2019 vs. 2018
The $69 million increase in gross profit in 2019 includes $80 million in increased gross profit from our GS business segment primarily driven by the volume growth in revenue, incremental profits resulting from the full year of operations from SGT, and favorable settlements on several legacy matters in our GS business segment including the private security legal matter. We also recognized incremental profits from construction services relateddue to the Aspire Defence projectreduced activity in the U.K. associated with index-based price adjustments. TS business segment gross profit increased by $12 million over 2018 levels based on increased volumes of proprietary equipment sales. Additionally, we recognized increased earnings of $11 million primarily due to the close-out of a completed project in our Non-strategic Business. These increases were partially offset by reductions in gross profit from our ES business segment due toMiddle East and lower margins on several major EPC projects and the non-recurrence of several favorable items including the recognition of variable considerationvolume associated with the successful completion of an LNG project in Australia occurring in 2018.non-recurring construction work on our Aspire program.
2018 vs. 2017
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Equity in Earnings (Losses) of Unconsolidated Affiliates |
| | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
Dollars in millions | 2021 | | 2020 | | $ | | % | | 2019 | | $ | | % |
Equity in earnings (losses) of unconsolidated affiliates | $ | (170) | | | $ | 30 | | | $ | (200) | | | (667) | % | | $ | 35 | | | $ | (5) | | | (14) | % |
The increase in gross profit in 2018 was primarily caused by strong organic growth in our GS logistics and engineering services businesses as well as one-time favorable settlements on legacy LogCAP III and CONCAP contract disputes. Also contributing to the increase in 2018 were the consolidation of the Aspire Defence subcontracting entities, the acquisition of SGT, and increased gross profit from our TS segment. These increases were partially offset by decreased gross profit in our ES segment due to overall reduced activity and the non-recurrence of the 2017 PEMEX settlement.
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Equity in Earnings of Unconsolidated Affiliates |
| | | | | 2019 vs. 2018 | | | | 2018 vs. 2017 |
Dollars in millions | 2019 | | 2018 | | $ | | % | | 2017 | | $ | | % |
Equity in earnings of unconsolidated affiliates | $ | 35 |
| | $ | 79 |
| | $ | (44 | ) | | (56 | )% | | $ | 70 |
| | $ | 9 |
| | 13 | % |
2019 vs. 2018
The decrease in equity in earnings (losses) of unconsolidated affiliates in 2019 was primarily due todriven by a non-cash charge in the substantial completionamount of a North Sea oil project$193 million recognized in the second quarter of 2021 and an unfavorable arbitration rulingadditional charge in early 2019the amount of $10 million for final warranty items associated with a subcontractor onthe joint venture's full and final settlement completed with the Ichthys LNG project. We also recognized an impairment of an equity method investmentclient in Latin America in 2019our STS business segment. In October 2021, JKC entered into a Settlement Agreement that resolved the outstanding claims and the non-recurrencedisputes between JKC and its client. As a result of the release of a tax liability on an Egyptian joint venture in 2018. See Note 8Settlement Agreement, the Parties agreed to our consolidated financial statements for more information onwithdraw all claims and terminate all ongoing arbitrations and court proceedings between the Ichthys LNG project.Parties.
2018 vs. 2017
The increase in equity in earnings of unconsolidated affiliates in 2018 was primarily due to increased earnings from our Brown & Root Industrial Services and EPIC joint ventures in the U.S. and a project specific joint venture in Europe. These increases were partially offset by the consolidation of the Aspire Defence subcontracting entities which moved results to gross profit, decreased earnings on our Affinity joint venture, reduced activity from a joint venture in Latin America, and decreased earnings on the Ichthys LNG project due to delays in the estimated completion date.
| | Selling, General and Administrative Expenses | | | | | | | | Selling, General and Administrative Expenses | | |
| | | | | 2019 vs. 2018 | | | | 2018 vs. 2017 | | 2021 vs. 2020 | | 2020 vs. 2019 |
Dollars in millions | 2019 | | 2018 | | $ | | % | | 2017 | | $ | | % | Dollars in millions | 2021 | | 2020 | | $ | | % | | 2019 | | $ | | % |
Selling, general and administrative expenses | $ | (341 | ) | | $ | (294 | ) | | $ | 47 |
| | 16 | % | | $ | (244 | ) | | $ | 50 |
| | 20 | % | Selling, general and administrative expenses | $ | (393) | | | $ | (335) | | | $ | 58 | | | 17 | % | | $ | (341) | | | $ | (6) | | | (2) | % |
2019 vs. 2018
The increase in 2019 of $47 million in selling,Selling, general and administrative expenses aswere $58 million higher in 2021 compared to 20182020, which was primarily relateddriven by increased expenses attributable to an increase inthe Centauri and Frazer-Nash acquisitions and other corporate costs, including increased IT, rebranding and other general corporate expenses.
2018 vs. 2017
The increasepartially offset by cost reductions to right-size the cost base in selling, general and administrative expenses in 2018 was primarily dueline with the business shift to increased expenses related to the acquisition of SGT acquired in early 2018 and organic growthexit non-strategic areas in our GSSTS business segment.
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Acquisition and Integration Related Costs | | | | | | | |
| | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
Dollars in millions | 2021 | | 2020 | | $ | | % | | 2019 | | $ | | % |
Acquisition and integration related costs | $ | (12) | | | $ | (9) | | | $ | 3 | | | n/m | | $ | (2) | | | $ | 7 | | | n/m |
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Acquisition and Integration Related Costs | | | | | | | |
| | | | | 2019 vs. 2018 | | | | 2018 vs. 2017 |
Dollars in millions | 2019 | | 2018 | | $ | | % | | 2017 | | $ | | % |
Acquisition and integration related costs | $ | (2 | ) | | $ | (7 | ) | | $ | (5 | ) | | n/m | | $ | — |
| | $ | 7 |
| | n/m |
2019 vs. 2018
The decrease in acquisition and integration related costs was primarily due to substantial completion of acquisition and integration activities in early 2019.
2018 vs. 2017
The increase in acquisition and integration related costs was associated with the Company's acquisitions of Centauri in 2018 was primarily due to $5 million of incremental costs related to the acquisition of SGTOctober 2020 and approximately $2 million related to the consolidationFrazer-Nash in October 2021.
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Goodwill Impairment, Restructuring Charges and Asset Impairments | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| 2021 | | 2020 | | $ | | % | | 2019 | | $ | | % |
Goodwill impairment | $ | — | | | $ | (99) | | | $ | (99) | | | n/m | | $ | — | | | $ | 99 | | | n/m |
Restructuring charges and asset impairments | (2) | | | (214) | | | (212) | | | n/m | | — | | | 214 | | | n/m |
In 2020, as a result of the Aspire subcontracting entities.economic and market volatility, management initiated a restructuring plan and we recognized goodwill impairments, restructuring charges and asset impairments resulting from that plan.
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Gain on Disposition of Assets and Investments | | | | | | | |
| | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
Dollars in millions | 2021 | | 2020 | | $ | | % | | 2019 | | $ | | % |
Gain on disposition of assets and investments | $ | 2 | | | $ | 18 | | | $ | (16) | | | n/m | | $ | 17 | | | $ | 1 | | | n/m |
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Gain (Loss) on Disposition of Assets | | | | | | | |
| | | | | 2019 vs. 2018 | | | | 2018 vs. 2017 |
Dollars in millions | 2019 | | 2018 | | $ | | % | | 2017 | | $ | | % |
Gain (loss) on disposition of assets | $ | 17 |
| | $ | (2 | ) | | $ | 19 |
| | (950 | )% | | $ | 5 |
| | $ | (7 | ) | | (140 | )% |
2019 vs. 2018
The decrease in gain on disposition of assets in 2019and investments of $16 million was primarily reflects the gain on sale of a U.S. government contract vehicle and sale of an equity method investment related to a roads project in Ireland within our GS Business segment. Additionally, we recognized a gain as a result ofdriven by the liquidation of several legal entities.a joint venture in 2020.
2018 vs. 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest Expense | | | | | | | |
| | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
Dollars in millions | 2021 | | 2020 | | $ | | % | | 2019 | | $ | | % |
Interest expense | $ | (92) | | | $ | (83) | | | $ | 9 | | | 11 | % | | $ | (99) | | | $ | (16) | | | (16) | % |
The loss on disposition of assets in 2018 primarily reflects the loss on sale of one of our unconsolidated affiliates within the ES Business segment.
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Gain on Consolidation of Aspire entities | | | | | | | |
| | | | | 2019 vs. 2018 | | | | 2018 vs. 2017 |
Dollars in millions | 2019 | | 2018 | | $ | | % | | 2017 | | $ | | % |
Gain on consolidation of Aspire entities | $ | — |
| | $ | 108 |
| | $ | (108 | ) | | n/m | | $ | — |
| | $ | 108 |
| | n/m |
The gain on consolidation of Aspire entities in 2018 was recognized upon the consolidation of the Aspire Defence subcontracting entities. See Note 4 to our consolidated financial statements for additional information.
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Interest Expense | | | | | | | |
| | | | | 2019 vs. 2018 | | | | 2018 vs. 2017 |
Dollars in millions | 2019 | | 2018 | | $ | | % | | 2017 | | $ | | % |
Interest expense | $ | (99 | ) | | $ | (66 | ) | | $ | 33 |
| | 50 | % | | $ | (21 | ) | | $ | 45 |
| | 214 | % |
2019 vs. 2018
The increase in interest expense in 2019 was primarily duedriven by increased expense associated with borrowings to increased fixed-rate borrowings as a resultfinance the acquisitions of the Convertible Notes in November 2018 partially offset by lower outstanding borrowingsCentauri and weighted-average interest rates on our variable-rate debt. See Note 14 to our consolidated financial statements for further discussion.Frazer-Nash.
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Other Non-operating Income (Expense) | | | | | | | |
| | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
Dollars in millions | 2021 | | 2020 | | $ | | % | | 2019 | | $ | | % |
Other non-operating income (expense) | $ | (5) | | | $ | 1 | | | $ | (6) | | | n/m | | $ | 5 | | | $ | (4) | | | (80) | % |
2018 vs. 2017
The increase in interest expense in 2018 compared to 2017 was primarily due to increased borrowings as a result of the SGT and Aspire acquisitions and increased capital investments in the JKC joint venture. Additionally, the weighted-average interest rate on our borrowings increased as a result of the refinancing of our Senior Credit Facility in April 2018.
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Other Non-operating Income (Loss) | | | | | | | |
| | | | | 2019 vs. 2018 | | | | 2018 vs. 2017 |
Dollars in millions | 2019 | | 2018 | | $ | | % | | 2017 | | $ | | % |
Other non-operating income (loss) | $ | 5 |
| | $ | (6 | ) | | $ | 11 |
| | 183 | % | | $ | 4 |
| | $ | (10 | ) | | (250 | )% |
2019 vs. 2018
Other non-operating income (loss)(expense) includes interest income, foreign exchange gains and losses and other non-operating income or expense items. The increase in other non-operating income was primarily due to the impact of favorable foreign currency movements on intercompany balance positions denominated in U.S. dollars partially offset by unfavorable variances on certain U.S. dollar cash positions held primarily in Australia.
2018 vs. 2017
The decrease in other non-operating income (loss) from 2017 to 2018 was primarily due to an increase in foreign exchange losses partially offset by an increase in other non-operating income related to interest income associated with the cash balances held by the Aspire Defence subcontracting entities.
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Provision for Income Taxes | | | | | | | | | | | | | |
| | | | | 2019 vs. 2018 | | | | 2018 vs. 2017 |
Dollars in millions | 2019 | | 2018 | | $ | | % | | 2017 | | $ | | % |
Income before provision for income taxes | $ | 268 |
| | $ | 396 |
| | $ | (128 | ) | | (32 | )% | | $ | 247 |
| | $ | 149 |
| | 60 | % |
(Provision) benefit for income taxes | $ | (59 | ) | | $ | (86 | ) | | $ | (27 | ) | | (31 | )% | | $ | 193 |
| | $ | 279 |
| | 145 | % |
2019 vs. 2018
The decrease in income tax expense in 2019 compared to 2018 was primarily driven by foreign exchange gains and losses.
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Provision for Income Taxes | | | | | | | | | | | | | |
| | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
Dollars in millions | 2021 | | 2020 | | $ | | % | | 2019 | | $ | | % |
Income before provision for income taxes | $ | 134 | | | $ | (25) | | | $ | 159 | | | 636 | % | | $ | 268 | | | $ | (293) | | | (109) | % |
(Provision) benefit for income taxes | $ | (108) | | | $ | (26) | | | $ | 82 | | | 315 | % | | $ | (59) | | | $ | (33) | | | (56) | % |
The increase in tax expense in 2021 compared to 2020 was driven by the absencefollowing factors: a) an increase in income year over year since the impairment and restructuring charges of 2020 were non-recurring b) an equity adjustment on the gainLNG project and c) the enactment of $108 million recognizeda tax rate change in 2018 as a result of obtaining control of the Aspire Defence project subcontracting joint ventures.U.K.
2018 vs. 2017
The 2018 period provision for income taxes is higher than the 2017 period primarily due to the valuation allowance release of $223 million on our U.S. deferred tax assets in 2017 well as higher income before provision for income taxes in 2018.
A reconciliation of our effective tax rates for 2019, 20182021, 2020 and 20172019 to the U.S. statutory federal rate and further information on the effects of the Tax Act is presented in Note 1513 to our consolidated financial statements.
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Net Income Attributable to Noncontrolling Interests |
| | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
Dollars in millions | 2021 | | 2020 | | $ | | % | | 2019 | | $ | | % |
Net income attributable to noncontrolling interests | $ | 8 | | | $ | 21 | | | (13) | | | (62) | % | | $ | 7 | | | $ | 14 | | | 200 | % |
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Net Income Attributable to Noncontrolling Interests |
| | | | | 2019 vs. 2018 | | | | 2018 vs. 2017 |
Dollars in millions | 2019 | | 2018 | | $ | | % | | 2017 | | $ | | % |
Net income attributable to noncontrolling interests | $ | (7 | ) | | $ | (29 | ) | | (22 | ) | | (76 | )% | | $ | (8 | ) | | $ | 21 |
| | 263 | % |
The decrease in net income attributable to noncontrolling interests in 2019 was primarily due todriven by the non-recurrenceresolution of a contingency matter on a completed LNG project and liquidation of the recognition of variable consideration associated with the successful completion and performance testing ofjoint venture in 2020, partially offset by income earned related to a major ES projectMiddle East joint venture project in Australia in 2018, executed by a consolidated joint venture.our STS business segment.
Results of Operations by Business Segment
We analyze the financial results for each of our threetwo core business segments, as well as our non-core segments. The business segments presented are consistent with our reportable segments discussed in Note 2 to our consolidated financial statements.
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| Years Ended December 31, |
| |
| |
| 2019 vs. 2018 |
| |
| 2018 vs. 2017 |
Dollars in millions | 2019 |
| 2018 |
| $ |
| % |
| 2017 |
| $ |
| % |
Revenues | | | | | | | | | | | |
Government Solutions | $ | 3,925 |
| | $ | 3,457 |
| | $ | 468 |
| | 14 | % | | $ | 2,193 |
| | $ | 1,264 |
| | 58 | % |
Technology Solutions | 374 |
| | 297 |
| | 77 |
| | 26 | % | | 269 |
| | 28 |
| | 10 | % |
Energy Solutions | 1,339 |
| | 1,157 |
| | 182 |
| | 16 | % | | 1,671 |
| | (514 | ) | | (31 | )% |
Subtotal | $ | 5,638 |
| — |
| $ | 4,911 |
| | $ | 727 |
| | 15 | % | | $ | 4,133 |
| | $ | 778 |
| | 19 | % |
Non-strategic Business | 1 |
| — |
| 2 |
| | (1 | ) | | (50 | )% | | 38 |
| | (36 | ) | | (95 | )% |
Total | $ | 5,639 |
| | $ | 4,913 |
| | $ | 726 |
| | 15 | % | | $ | 4,171 |
| | $ | 742 |
| | 18 | % |
| | | | | | | | | | | | | |
Gross profit (loss) | | | | | | | | | | | | | |
Government Solutions | $ | 430 |
| | $ | 350 |
| | $ | 80 |
| | 23 | % | | $ | 188 |
| | $ | 162 |
| | 86 | % |
Technology Solutions | 118 |
| | 106 |
| | 12 |
| | 11 | % | | 98 |
| | 8 |
| | 8 | % |
Energy Solutions | 100 |
| | 134 |
| | (34 | ) | | (25 | )% | | 153 |
| | (19 | ) | | (12 | )% |
Subtotal | $ | 648 |
| | $ | 590 |
| | $ | 58 |
| | 10 | % | | $ | 439 |
| | $ | 151 |
| | 34 | % |
Non-strategic Business | 5 |
| | (6 | ) | | 11 |
| | n/m |
| | — |
| | (6 | ) | | n/m |
|
Total | $ | 653 |
| | $ | 584 |
| | $ | 69 |
| | 12 | % | | $ | 439 |
| | $ | 145 |
| | 33 | % |
| | | | | | | | | | | | | |
Equity in earnings of unconsolidated affiliates | | | | | | | | |
Government Solutions | $ | 29 |
| | $ | 32 |
| | $ | (3 | ) | | (9 | )% | | $ | 43 |
| | $ | (11 | ) | | (26 | )% |
Technology Solutions | — |
| | — |
| | — |
| | n/m |
| | — |
| | — |
| | n/m |
|
Energy Solutions | 19 |
| | 50 |
| | (31 | ) | | (62 | )% | | 27 |
| | 23 |
| | 85 | % |
Subtotal | $ | 48 |
| | $ | 82 |
| | $ | (34 | ) | | (41 | )% | | $ | 70 |
| | $ | 12 |
| | 17 | % |
Non-strategic Business | (13 | ) | | (3 | ) | | (10 | ) | | n/m |
| | — |
| | (3 | ) | | n/m |
|
Total | $ | 35 |
| | $ | 79 |
| | $ | (44 | ) | | (56 | )% | | $ | 70 |
| | $ | 9 |
| | 13 | % |
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Total general and administrative expense | $ | (341 | ) | | $ | (294 | ) | | $ | 47 |
| | 16 | % | | $ | (244 | ) | | $ | 50 |
| | 20 | % |
| | | | | | | | | | | | | |
Acquisition and integration related costs | $ | (2 | ) | | $ | (7 | ) | | $ | (5 | ) | | n/m |
| | $ | — |
| | $ | 7 |
| | n/m |
|
| | | | | | | | | | | | | |
Asset impairment and restructuring charges | $ | — |
| | $ | — |
| | $ | — |
| | n/m |
| | $ | (6 | ) | | $ | (6 | ) | | (100 | )% |
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(Loss) Gain on disposition of assets | $ | 17 |
| | $ | (2 | ) | | $ | 19 |
| | (950 | )% | | $ | 5 |
| | $ | (7 | ) | | (140 | )% |
| | | | | | | | | | | | | |
Gain on consolidation of Aspire entities | $ | — |
| | $ | 108 |
| | $ | (108 | ) | | n/m |
| | $ | — |
| | $ | 108 |
| | n/m |
|
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Total operating income (loss) | $ | 362 |
| | $ | 468 |
| | $ | (106 | ) | | (23 | )% | | $ | 264 |
| | $ | 204 |
| | 77 | % |
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| Years Ended December 31, |
| | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
Dollars in millions | 2021 | | 2020 | | $ | | % | | 2019 | | $ | | % |
Revenues | | | | | | | | | | | |
Government Solutions | $ | 6,149 | | | $ | 4,055 | | | $ | 2,094 | | | 52 | % | | $ | 4,042 | | | $ | 13 | | | — | % |
Sustainable Technology Solutions | 1,190 | | | 1,712 | | | (522) | | | (30) | % | | 1,597 | | | 115 | | | 7 | % |
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Total revenues | $ | 7,339 | | 0 | $ | 5,767 | | | $ | 1,572 | | | 27 | % | | $ | 5,639 | | | $ | 128 | | | 2 | % |
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Gross profit (loss) | | | | | | | | | | | | | |
Government Solutions | $ | 575 | | | $ | 493 | | | $ | 82 | | | 17 | % | | $ | 444 | | | $ | 49 | | | 11 | % |
Sustainable Technology Solutions | 231 | | | 173 | | | 58 | | | 34 | % | | 209 | | | (36) | | | (17) | % |
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Total gross profit | $ | 806 | | | $ | 666 | | | $ | 140 | | | 21 | % | | $ | 653 | | | $ | 13 | | | 2 | % |
| | | | | | | | | | | | | |
Equity in earnings (losses) of unconsolidated affiliates | | | | | | | | |
Government Solutions | $ | 29 | | | $ | 28 | | | $ | 1 | | | 4 | % | | $ | 29 | | | $ | (1) | | | (3) | % |
Sustainable Technology Solutions | (199) | | | 2 | | | (201) | | | n/m | | 6 | | | (4) | | | n/m |
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Total equity in earnings (losses) of unconsolidated affiliates | $ | (170) | | | $ | 30 | | | $ | (200) | | | (667) | % | | $ | 35 | | | $ | (5) | | | (14) | % |
| | | | | | | | | | | | | |
Selling, general and administrative expenses | $ | (393) | | | $ | (335) | | | $ | 58 | | | 17 | % | | $ | (341) | | | $ | (6) | | | (2) | % |
| | | | | | | | | | | | | |
Acquisition and integration related costs | $ | (12) | | | $ | (9) | | | $ | 3 | | | n/m | | $ | (2) | | | $ | 7 | | | n/m |
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Goodwill impairment | $ | — | | | $ | (99) | | | $ | (99) | | | n/m | | $ | — | | | $ | 99 | | | n/m |
| | | | | | | | | | | | | |
Restructuring charges and asset impairment | $ | (2) | | | $ | (214) | | | $ | (212) | | | n/m | | $ | — | | | $ | 214 | | | n/m |
| | | | | | | | | | | | | |
Gain on disposition of assets | $ | 2 | | | $ | 18 | | | $ | (16) | | | n/m | | $ | 17 | | | $ | 1 | | | n/m |
| | | | | | | | | | | | | |
Total operating income | $ | 231 | | | $ | 57 | | | $ | 174 | | | 305 | % | | $ | 362 | | | $ | (305) | | | (84) | % |
n/m - not meaningful
Government Solutions
2019 vs. 2018
GS revenues increased by $468$2.1 billion, or 52%, to $6.1 billion in 2021 compared to $4.1 billion in 2020. The increase was primarily driven by organic revenue growth across each of our GS business units, including new work associated with the OAW program which contributed $1.6 billion in 2021. Additionally, the increase is attributed to the acquisitions of Centauri in October 2020 and Frazer-Nash in October 2021. These increases were partially offset by reduced activity in the Middle East and lower volume associated with the successful completion of non-recurring services on the Aspire program.
GS gross profit increased by $82 million, or 14%17%, to $3.9$575 million in 2021 compared to $493 million in 2020. The increase was primarily driven by organic growth, including new work under the OAW program, and the Centauri and Frazer-Nash acquisitions discussed above. This was partially offset by the higher amortization of intangibles from the acquisitions, reduced activity in the Middle East and lower volume associated with the successful completion of non-recurring work on our Aspire program.
GS equity earnings of unconsolidated affiliates increased by $1 million to $29 million in 2021 compared to $28 million in 2020, which was primarily driven by better performance of joint ventures and increased work in our International business, partially offset by changes in project estimates in a domestic joint venture.
Sustainable Technology Solutions
STS revenues decreased by $522 million, or 30%, to $1.2 billion in 2019,2021, compared to $3.5$1.7 billion in 2018. This2020. The decrease was primarily driven by the Company's exit from commoditized construction services in 2020.
STS gross profit increased by $58 million, or 34%, to $231 million in 2021, compared to $173 million in 2020. The increase was primarily driven by strong growth within our GS business from newexecution and existing U.S. government contracts including increased volumes for disastermarket recovery services provided to the U.S. Air Force on the AFCAP IV project, expanded services provided to the U.S. Army in Iraq and Europe on the LogCAP IV project, human performance and behavioral health services provided to the U.S. Special Operations Command and increased engineering services on various other U.S. government programs. GS revenues from the April 2018 acquisition of SGT increased by approximately $139 million2021, expenses recognized in 2019 on a year-over-year basis. A new award from the U.K. MoD for services2020 that did not recur in the Middle East also contributed to the increase in revenues in 2019.
GS gross profit increased by $80 million, or 23%, to $430 million in 2019, compared to $350 million in 2018. The increase in 2019 was primarily due to the increased volumes on U.S. government contracts2021 and the full yearnet favorable resolution of operations from SGT. In addition, we received a favorable judgment to close out the private security legal matter and settled several otherprovision for legacy matters on the LogCAP III contract during the year. We recognized incremental profits from construction services related to the Aspire Defence project in the U.K. as uncertainties associated with index-based price adjustments have begun to dissipate.2021.
GSSTS equity in earnings inof unconsolidated affiliates decreased by $3 million, or 9%, to $29 million in 2019, compared to $32 million in 2018. The decrease is due to the consolidation of the Aspire Defence subcontracting entities in January 2018 as well as lower profitability from a joint venture project to provide support services on a U.S. government project.
2018 vs. 2017
GS revenues increased by $1.3 billion, or 58%, to $3.5 billion in 2018, compared to $2.2 billion in 2017. This increase was primarily due to strong organic growth in our logistics and engineering services business, an additional $533 million of revenues from the consolidation of the Aspire Defence subcontracting entities in January 2018, and an additional $342 million of revenues from the acquisition of SGT in April 2018.
GS gross profit increased by $162 million, or 86%, to $350 million in 2018, compared to $188 million in 2017. This increase was primarily due to $61 million of gross profit from the consolidation of the Aspire Defence subcontracting entities, $31 million of gross profit from the acquisition of SGT, increases from organic revenue growth in our logistics and engineering services business areas, and one-time favorable settlements on legacy CONCAP and LogCAP III matters which contributed $11$201 million to gross profit.
GS equity$199 million loss in earnings in unconsolidated affiliates decreased by $11 million, or 26%, to $32 million in 2018, compared to $43 million in 2017. This decrease was primarily due to the consolidation of the Aspire Defence subcontracting entities.
Technology Solutions
2019 vs. 2018
TS revenues increased by $77 million, or 26%, to $374 million in 2019 compared to $297 million in 2018, primarily due to higher proprietary equipment sales.
TS gross profit increased by $12 million, or 11%, to $118 million in 2019 compared to $106 million in 2018, primarily driven by increased revenue volume at lower gross profit margins resulting from a less favorable mix of license and proprietary equipment sales.
2018 vs. 2017
TS revenues increased by $28 million, or 10% to $297 million in 2018 compared to $269 million in 2017, primarily due to an increase in volume within the petrochemicals, syngas, and refining product lines.
TS gross profit increased by $8 million, or 8%, to $106 million in 2018 compared to $98 million in 2017, primarily due to the mix of license and proprietary equipment sales as well as the overall volume of projects.
Energy Solutions
2019 vs. 2018
ES revenues increased by $182 million, or 16%, to $1.3 billion in 2019, compared to $1.2 billion in 2018. Revenues increased by approximately $173 million in our Services and Consulting business primarily due to the ramp up of recently awarded projects and expansion of services internationally, primarily in the Middle East. Revenue increases from new cost-reimbursable projects along the U.S. Gulf Coast in our EPC Delivery Solutions business were substantially offset by declines resulting from the completion of various EPC projects in the U.S. as well as the Ichthys LNG project in Australia.
ES gross profit decreased by $34 million, or 25% to $100 million in 2019, compared to $134 million in 2018. This decrease was primarily due to non-recurring 2018 events including the recognition of variable consideration associated with the successful completion of an LNG project in Australia and favorable close-outs on several ammonia projects in the U.S. Also contributing to the decline were lower profits from services provided to the Ichthys LNG project joint venture. These decreases were partially offset by earnings in 2019 resulting from the ramp up of new projects in the Middle East and the favorable settlement reached with a supplier on an ammonia project completed in the U.S.
ES equity in earnings in unconsolidated affiliates decreased by $31 million, or 62%, to $19 million in 2019, compared to $50 million in 2018. This decrease was primarily due to the substantial completion of a North Sea oil project, lower earnings due to an unfavorable arbitration ruling in early 2019 associated with a subcontractor on the Ichthys LNG project, and non-recurrence of a release of a tax liability on an Egyptian joint venture in 2018. See Note 8 to our consolidated financial statements for more information on the Ichthys LNG project.
2018 vs. 2017
ES revenues decreased by $514 million, or 31%, to $1.2 billion in 2018, compared to $1.7 billion in 2017. This decrease was primarily due to reduced activity and the completion or near completion of several projects in the U.S. and Canada, and the non-recurrence of $35 million in revenue from the PEMEX settlement in 2017. These decreases were partially offset by new wins and growth on existing projects and the recognition of variable consideration associated with the successful completion and performance testing of a major ES project.
ES gross profit decreased by $19 million, or 12% to $134 million in 2018, compared to $153 million in 2017. This decrease was primarily due to the non-recurrence of $35 million in revenue from the PEMEX settlement and projects completing or nearing completion and the under recovery of resources. These decreases were partially offset by the recognition of variable consideration associated with the successful completion and performance testing of a major ES project and a one-time favorable settlement on an ammonia/urea plant in the U.S.
ES equity in earnings in unconsolidated affiliates increased by $23 million, or 85%, to $50 million in 2018, compared to $27 million in 2017. This increase was primarily due to an increase in earnings provided by a JV in Europe and increased earnings from the Brown & Root Industrial Services and EPIC joint ventures in the U.S. These increases were partially offset by decreased activity on a joint venture in Mexico and a decrease in earnings on the Ichthys LNG project due to an EAC increase and schedule prolongation.
Non-strategic Business
2019 vs. 2018
Non-strategic Business generated revenues of $1 million in 20192021, compared to $2 million in 2018. Revenuesequity earnings in 2020. The decrease was primarily driven by a non-cash charge in the Non-strategic Business were primarilyamount of $193 million that was recognized during the second quarter of 2021 and an additional charge in the amount of $10 million for final warranty items associated with close-out activities on completed projects as we exit the business.
Non-strategic Business earned $5 million of gross profit in 2019 primarily due to favorable benefits on the close-out of a completedIchthys LNG project recognized in the U.S, compared to a gross lossthird quarter of $6 million in 2018 primarily due to the settlement of a legacy legal matter.2021.
Non-strategic Business equity in earnings from unconsolidated affiliates decreased by $10 million to a loss $13 million in 2019 as compared to a loss of $3 million in 2018 primarily due to an impairment charge associated with an equity method investment in Latin America. See Note 2 to our consolidated financial statements for a discussion of the reclassification of certain operations between our ES and Non-strategic Business segments.
2018 vs. 2017
Non-strategic Business revenues decreased by $36 million, or 95%, to $2 million in 2018 compared to $38 million in 2017. This decrease was due to completion or near completion of two power projects as we exit those businesses.
Non-strategic Business incurred a gross loss of $6 million in 2018 compared to a gross loss of $0 million in 2017. This change was primarily due to the settlement of a legacy legal matter during the year ended 2018.
Changes in Project-related Estimates
With a portfolio of more than one thousand contracts, we generally realize both lower and higher than expected margins on projects in any given period due to judgments and estimates inherent in revenue recognition for our contracts. 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. See Notes 1 and 2 to our consolidated financial statements for additional information related to our use of estimates and changes in project-related estimates. Information discussed therein is incorporated by reference into this Part II, Item 7.
Acquisitions, Dispositions and Other Transactions
Information relating to various acquisitions, dispositions and other transactions is described in Notes 4, 11 and 12 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part II, Item 7.
Backlog of Unfilled Orders
Backlog generally represents the total dollar amount of revenues we expect to realize in the future as a result of performing work on contracts and our pro-rata share of work to be performed by unconsolidated joint ventures. We generally include total expected revenues in backlog when a contract is awarded under a legally binding agreement. In many instances, arrangements included in backlog are complex, nonrepetitive and may fluctuate over the contract period due to the release of contracted work in phases by the customer. Additionally, nearly all contracts allow customers to terminate the agreement at any time for convenience. Where contract duration is indefinite and clients can terminate for convenience without compensating us for periods beyond the date of termination, backlog is limited to the estimated amount of expected revenues within the following twelve months. Certain contracts provide maximum dollar limits, with actual authorization to perform work under the contract agreed upon on a periodic basis with the customer. In these arrangements, only the amounts authorized are included in backlog. For projects where we act solely in a project management capacity, we only include the expected value of our services in backlog.
ForWe define backlog, as it relates to U.S. government contracts, backlog includesas our estimate of the remaining future revenue from existing signed contracts over the remaining base contract performance period (including customer approved option periods) for which work scope and price have been agreed with the customer. FundedWe define funded backlog representsas the portion of backlog for which funding currently is appropriated, less the amount of revenue we have previously recognized. UnfundedWe define unfunded backlog representsas the total backlog less the funded backlog. Our GS backlog does not include any estimate of future potential delivery orders that might be awarded under our government-wide acquisition contracts, agency-specific indefinite delivery/indefinite quantity contracts or other multiple-award contract vehicles, nor does it include option periods that have not been exercised by the customer.
ForWithin our GS business segment, we calculate estimated backlog for long-term contracts associated with the U.K. governmentgovernment's PFIs we estimate backlog based on the aggregate amount that our client would contractually be obligated to pay us over the life of the project. We update our estimates of the future work to be executed under these contracts on a quarterly basis and adjust backlog if necessary.
Refer to "Item 1A. Risk Factors" contained in Part 1 of this Annual Report on Form 10-K for a discussion of other factors that may cause backlog to ultimately convert into revenues at different amounts.
We have included in the table below our proportionate share of unconsolidated joint ventures' estimated backlog. SinceAs these projects are accounted for under the equity method, only our share of future earnings from these projects will be recorded in our results of operations. Our proportionate share of backlog for projects related to unconsolidated joint ventures totaled $2.6 billion and $3.0$2.4 billion at December 31, 20192021 and 2018,2020, respectively. Our backlog included in the table below for projects related to consolidated joint ventures with noncontrolling interests includes 100% of the backlog associated with those joint ventures and totaled $5.3 billion$37 million and $52 million at both December 31, 20192021 and 2018.2020, respectively.
The following table summarizes our backlog by business segment for the years ended December 31, 20192021 and December 31, 2018,2020, respectively:
| | | | | | | | | | | |
Dollars in millions | December 31, 2021 | | December 31, 2020 |
Government Solutions | $ | 12,628 | | | $ | 12,661 | |
Sustainable Technology Solutions | 2,345 | | | 2,454 | |
Total backlog | $ | 14,973 | | | $ | 15,115 | |
|
| | | | | | | |
Dollars in millions | December 31, 2019 | | December 31, 2018 |
Government Solutions | $ | 10,960 |
| | $ | 11,005 |
|
Technology Solutions | 579 |
| | 594 |
|
Energy Solutions | 3,097 |
| | 1,896 |
|
Subtotal | 14,636 |
| | 13,495 |
|
Non-strategic Business | — |
| | 2 |
|
Total backlog | $ | 14,636 |
| | $ | 13,497 |
|
We estimate that as of December 31, 2019, 31%2021, 30% of our backlog will be executed within one year. Of this amount, 88%91% will be recognized as revenuein revenues on our consolidated statement of operations and 12%9% will be recorded by our unconsolidated joint ventures. As of December 31, 2019, $682021, $180 million of our backlog relates to active contracts that are in a loss position.
As of December 31, 2019, 11%2021, 12% of our backlog was attributable to fixed-price contracts, 50%46% was attributable to PFIs, and 39%29% was attributable to cost-reimbursable contracts and 13% was attributable to time-and-materials contracts. For contracts that contain both fixed-price, cost-reimbursable and cost-reimbursabletime-and-materials components, we classify the individual components as either fixed-price, cost-reimbursable or cost-reimbursabletime-and materials according to the composition of the contract; however, for smaller contracts, we characterize the entire contract based on the predominant component. As of December 31, 2019, $9.22021, $9.5 billion of our GS backlog was currently funded by our customers.
As of December 31, 2019,2021, we had approximately $2.8$4.7 billion of priced option periods for U.S. government contracts that are not included in the backlog amounts presented above.
The difference between backlog of $14.6$15.0 billion and the remaining performance obligation as defined by ASC 606 of $11.4$11.7 billion is primarily due to our proportionate share of backlog related to unconsolidated joint ventures which is not included in our remaining performance obligation. See Note 3 to our consolidated financial statements for discussion of the remaining performance obligations.
Liquidity and Capital Resources
Liquidity is provided by available cash and equivalents, cash generated from operations, our Senior Credit Facility and access to financialcapital markets. Our operating cash flow can vary significantly from year to year and is affected by the mix, terms, timing and percentagestage of completion of our projects. We often receive cash in the early phases of our larger fixed-price projects, technology projects,projects. On time-and-material and those of our consolidated joint ventures in advance of incurring related costs. Oncost reimbursable contracts, we may utilize cash on hand or availability under our Senior Credit Facility to satisfy any periodic operating cash requirements for working capital, as we frequently incur costs and subsequently invoice our customers.
ESSTS services projects generallymay require us to provide credit support for our performance obligations to our customers in the form of letters of credit, surety bonds or guarantees. Our ability to obtain new project awards in the future may be dependent on
our ability to maintain or increase our letter of credit and surety bonding capacity, which may be further dependent on the timely release of existing letters of credit and surety bonds. As the need for credit support arises, letters of credit willmay be issued under our $500 million PLOC$1 billion bank Revolver or our $500 million Revolver under our Senior Credit Facility. Letters of credit may also be arranged with our bankslending counterparties on a bilateral, syndicated or other basis.
As discussed in Note 12 "Debt and Other Credit Facilities" of our consolidated financial statements, on November 18, 2021, we entered into Amendment No. 5 under our existing Credit Agreement, dated as of April 25, 2018 ("Pro Rata Facilities") consisting of a $1 billion revolving credit facility (the "Revolver"), a $442 million Term Loan A, ("Term Loan A") with debt tranches denominated in US dollars, Australian dollars and British pound sterling and a $512 million Term Loan B ("Term Loan B"), with an aggregate capacity of $1.954 billion. The Amendment, among other things, (i) established an additional tranche of £122.1 million in Term Loan A incurred by Kellogg Brown & Root Limited, a wholly owned indirect
subsidiary of KBR, Inc., organized under the laws of England and Wales, (ii) increased capacity and flexibility under certain negative covenants, (iii) permits the netting of unrestricted cash up to a specified cap for purposes of calculating the leverage ratio and (iv) reduced the interest rate payable for applicable margins and commitment fees and extended the maturity dates to November 2026 for Term Loan A and the Revolver. The maturity date of Term Loan B remained unchanged maturing February 2027.
We believe that existing cash balances, internally generated cash flows, availability under our Senior Credit Facility and other lines of credit are sufficient to support our business operations for the next 12 months. As of December 31, 2019,2021, we were in compliance with all financial covenants related to our debt agreements.
Cash and equivalents totaled $712$370 million at December 31, 20192021 and $739$436 million at December 31, 20182020 and consisted of the following:
| | | | | | | | | | | |
| December 31, |
Dollars in millions | 2021 | | 2020 |
Domestic U.S. cash | $ | 34 | | | $ | 54 | |
International cash | 220 | | | 231 | |
Joint venture and Aspire Defence project cash | 116 | | | 151 | |
Total | $ | 370 | | | $ | 436 | |
|
| | | | | | | |
| December 31, |
Dollars in millions | 2019 | | 2018 |
Domestic U.S. cash | $ | 207 |
| | $ | 211 |
|
International cash | 245 |
| | 210 |
|
Joint venture and Aspire project cash | 260 |
| | 318 |
|
Total | $ | 712 |
| | $ | 739 |
|
Our cash balances are held in numerous accounts throughout the world to fund our global activities. Domestic cash relates to cash balances held by U.S. entities and is largely used to support project activities of those businesses as well as general corporate needs such as the payment of dividends to shareholders, repayment of debt and potential repurchases of our outstanding common stock.
Our international cash balances may be available for general corporate purposes but are subject to local restrictions, such as capital adequacy requirements and local obligations, including maintaining sufficient cash balances to support our U.K. pension plan and other obligations incurred in the normal course of business by those foreign entities. Repatriations of our undistributed foreign earnings are generally free of U.S. tax but may incur withholding and/or state taxes. We consider our future U.S. and non-U.S. cash needs such as 1) our anticipated foreign working capital requirements, including funding of our U.K. pension plan, 2) the expected growth opportunities across all geographical markets and 3) our plans to invest in strategic growth opportunities, thatwhich may include acquisitions around the world, including whether foreign earnings are permanently reinvested. For December 31, 2019,
In 2021, we changed our permanent reinvestment assertion on our undistributedthe unremitted earnings, onas well as all current and future earnings in a wholly owned subsidiary in Saudi Arabia. KBR hasIndia. We determined that $70the past unremitted earnings of $30 million of undistributed earnings is available for future repatriation of cash for deployment in the U.S. Accordingly, we have recorded the income tax expense expected with the repatriation in 2021, which was less than $2 million. In addition, we changed our permanent reinvestment assertion on all current and future repatriation.earnings in our subsidiaries in Saudi Arabia. The income tax expense associated with the current and future earnings will be reflected in the interim and annual periods in which the earnings are generated. The impact is not material to income tax expense. If management were to completely remove the indefinite investment assertion on all foreign subsidiaries, the exposure to local withholding taxes would be less than $9 million.
Joint venture cash and Aspire Defence project cash balances reflect the amounts held by joint venture entities that we consolidate for financial reporting purposes. These amounts are limited to those entities' activities and are not readily available for general corporate purposes; however, portions of such amounts may become available to us in the future should there be a distribution of dividends to the joint venture partners. We expect that the majority of the joint venture cash balances will be utilized for the corresponding joint venture projects.purposes or for paying dividends. Joint venture cash and Aspire Defence project cash balances reflect the amounts held by joint venture entities that we consolidate for financial reporting purposes. These amounts are limited to those entities' activities and are not readily available for general corporate purposes; however, portions of such amounts may become available to us in the future should there be a distribution of dividends to the joint venture partners. We expect that the majority of the joint venture cash balances will be utilized for the corresponding joint venture purposes or for paying dividends.
As of December 31, 2019,2021, substantially all of our excess cash was held in commercial bank time deposits or interest bearing operating accounts or short-term investment accounts with the primary objectives of preserving capital and maintaining liquidity.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
Dollars in millions | | 2021 | | 2020 | | 2019 |
Cash flows provided by operating activities | | $ | 278 | | | $ | 367 | | | $ | 256 | |
Cash flows used in investing activities | | (428) | | | (877) | | | (158) | |
Cash flows provided by (used in) financing activities | | 87 | | | 225 | | | (133) | |
Effect of exchange rate changes on cash | | (3) | | | 9 | | | 8 | |
(Decrease) increase in cash and equivalents | | $ | (66) | | | $ | (276) | | | $ | (27) | |
|
| | | | | | | | | | | | |
| | Years ended December 31, |
Dollars in millions | | 2019 | | 2018 | | 2017 |
Cash flows provided by operating activities | | $ | 256 |
| | $ | 165 |
| | $ | 193 |
|
Cash flows used in investing activities | | (158 | ) | | (491 | ) | | (12 | ) |
Cash flows (used in) provided by financing activities | | (133 | ) | | 654 |
| | (290 | ) |
Effect of exchange rate changes on cash | | 8 |
| | (28 | ) | | 12 |
|
Increase (decrease) in cash and equivalents | | $ | (27 | ) | | $ | 300 |
| | $ | (97 | ) |
Operating Activities. Cash provided by operations totaled $278 million and $367 million in 2021 and 2020, respectively as compared to net income of $26 million and net loss of $51 million in 2021 and 2020, respectively. Cash flows from operating activities result primarily from earnings and are affected by changes in operating assets and liabilities, which consist primarily of working capital balances for projects. Working capital levels vary from year to year and are primarily affected by the Company's volume of work. These levels are also impacted by the mix, stage of completion and commercial terms of projects. Working capital requirements also vary by project depending on the type of client and location throughout the world. Most contracts require payments as the projects progress. Additionally, certain projects receive advance payments from clients. A normal trend for these projects is to have higher cash balances during the initial phases of execution which then decline to equal project earnings at the end of the construction phase. As a result, our cash position is reduced as customer advances are worked off, unless they are replaced by advances on other projects.
The primary components of our working capital accounts are accounts receivable, contract assets, accounts payable and contract liabilities. These components are impacted by the size and changes in the mix of our cost reimbursablecost-reimbursable and time-and-material projects versus fixed price projects, and as a result, fluctuations in these components are not uncommon in our business.
Cash provided by operations totaled $256 million in 2019 as compared to net income of $209 million. The difference primarily results from net changes in working capital balances for projects as discussed below:
The $16 Specifically, the $476 million unfavorable cash flow impact related to accounts receivable was primarily related to increased billing volume due to the ramp up of recently awarded cost-reimbursable projects in the Middle East and several new EPC projects in the U.S. within our ES business segment offset by strong collections on several projects in our GS business segment.
The $31 million unfavorable cash flow impact related to contract assets was largely attributable to higher activity on EPC projects in our ES business segment as well as increased volume in our TS business segment.
The $23 million favorable cash flow impact related to increased accounts payable on several projects in the U.S. and Middle East in our ES business segment as well as various projects in our TS business segment, offset by decreased volume as a U.S. project winds down in our GS business segment.
| |
• | The $19 millionfavorable cash flow impact related to contract liabilities was primarily due to advances related to growth and ramp up of new EPC and services primarily in the U.S. in our ES business segment, offset by progress on several projects in our TS business segment.
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| |
• | We received distributions of earnings from our unconsolidated affiliates of $69 million and contributed $45 million to our pension funds in 2019. In addition, we collected $57 million from the U.S. Army in the private security matter contractor settlement, of which $44 million which was previously recorded in "Claims receivable" on our consolidated balance sheets.
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Cash provided by operations totaled $165 million in 2018 as compared to net income of $310 million. The difference primarily results from the non-cash gain on consolidation of Aspire subcontracting entities of $108 million and net unfavorable changes of $123 million in working capital balances for projects as discussed below.
The $203 million unfavorable cash flow impact related to accounts receivable was primarily related to increases in accounts receivable in our GS U.S. operations and increases in accounts receivable in the consolidated Aspire Defence subcontracting entities, since the date we obtained control. These increases are largely attributable to growth in our business and the transition associated with our recent acquisitions and system implementations. We generally expect these increases to reverse over time.
The $25 million favorable cash flow impact related to contract assets was primarily related to increases in contract assets related to various projects in our Technology and GS business segments, partially offset by decreases in contract assets in our ES business segment.
The $112$447 million favorable cash flow impact related to accounts payable waswere primarily related to an increase in accounts payable related todriven by increased volume associated with the consolidated Aspire Defence subcontracting entities subsequent to the date we obtained control and growth in our business on various other U.S. government projects. This increase was partially offset by decreases in accounts payable related to our ES and Technology business segments.OAW program.
The $60 million unfavorable cash flow impact related to contract liabilities was primarily related to workoff on projects nearing completion within our ES business segment and partially offset with various projects in our GS business segment.
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• | In addition, we received distributions of earnings from our unconsolidated affiliates of $75 million and contributed $41 million to our pension funds in 2018.
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Investing activities. Cash used in investing activities totaled $158$428 million in 20192021, which included $406 million net cash used for the acquisition of Frazer-Nash and Harmonic and acquisition of a technology license, $29 million of cash used primarily for funding our proportionate share of JKC's ongoing legal and commercial costs and an investment in a plastics recycling technology and $30 million used for capital expenditures, partially offset by proceeds received of $44 million, which was primarily due to investment in JKC. See Note 8 to our consolidated financial statements for discussionfrom the sale of the Ichthys Project and our investment contributions to JKC.interest in the Middle East Petroleum Corporation (EBIC Ammonia project).
Cash used in investing activities totaled $491$877 million in 20182020 and was primarily dueattributable to the acquisition of SGTCentauri, net of cash acquired of $823 million, the acquisition of SMA and investment in JKC, partially offset by the incremental cash resulting from the consolidationfunding our proportionate share of the Aspire subcontracting entities.JKC's ongoing legal and commercial costs.
Financing activities. Cash used inprovided by financing activities totaled $133$87 million in 20192021 and was primarily due to $70borrowings of $290 million on our Senior Credit Facility and $12 million in net proceeds received from the issuance of common stock, offset by $82 million for the repurchase of common stock under our share repurchase program, $61 million of dividend payments to common shareholders, $27 million in payments on borrowings underrelated to our Senior Credit Facility, $13 million repayment on our finance lease obligations, $4 million repayment on our non-recourse debt associated with our Fasttrax joint venture and $46dividends paid to NCI shareholders of $23 million for dividend payments(of which $15 million was driven by the dividends paid to common shareholders.the minority interest of the sale of the EBIC Ammonia plant).
Cash provided by financing activities totaled $654$225 million in 20182020 and was primarily includes $1.1 billion in borrowings on Term Loans A and B, $350due to approximately $245 million from issuance of Convertible Notes, $250 million from borrowings from revolving credit agreement and $22 million fromnet proceeds from salethe offering of warrants. These sourcesour 4.750% Senior Notes due 2028 and borrowings of cash were partially$260 million on our Senior Credit Facility, offset by $820$410 million ofin net payments on borrowings $62 million in purchase of note hedges, $57 million in debt issuance costs, $56 millionwhich includes voluntary principal payments related to acquire the noncontrolling interest in the Aspire Defence subcontracting entities and the remaining 25% noncontrolling interest in onerefinancing of our otherSenior Credit Facility, $11 million repayment on our non-recourse debt associated with our Fasttrax joint ventures and $44venture, $11 million forrepayment on our finance lease obligations, $54 million of dividend payments to common shareholders and $47 million for the repurchase of common stock under our common stock.share repurchase program. See Note 14 to our consolidated financial statements12 "Debt and Other Credit Facilities" for further discussion of debtour Senior Credit Facility and credit facilities.Note 19 "Share Repurchases" for further discussion on our share repurchase program.
Future sources of cash. We believe that future sources of cash include cash flows from operations (including accounts receivable monetization arrangements), cash derived from working capital management and cash borrowings under ourthe Senior Credit Facility.
Future uses of cash. We believe that future uses of cash include working capital requirements, joint venture capital calls, capital expenditures, dividends, pension funding obligations, repayments of borrowings, under our Senior Credit Facility, share repurchases and strategic investments including acquisitions. Our capital expenditures will be focused primarily on facilities and equipment to support our businesses. In addition, we will use cash to make payments under leases and various other obligations, including potential litigation payments, as they arise.
Other factors potentially affecting liquidity
Ichthys LNG Project. As discussed inIn reference to Note 86 "Unapproved Change Orders, and Claims, Against Clients and Estimated Recoveries of Claims Against Suppliers and Subcontractors” to our consolidated financial statements, in October 2021, JKC has includedentered into a binding settlement agreement (the “Settlement Agreement”) that resolved the outstanding claims and disputes between JKC and its client, Ichthys LNG Pty, Ltd (collectively, “the Parties”). As a result of the Settlement Agreement, the Parties agreed to withdraw all claims and terminate all ongoing arbitrations and court proceedings between the Parties, including the following:
•Under the cost-reimbursable scope of the contract, JKC believed amounts paid or payable to the suppliers and subcontractors in settlement of their contract claims related to the cost-reimbursable scope were an adjustment to the contract price. JKC made claims for such contract price adjustments; however, the client disputed some of these contract price adjustments. In order to facilitate the continuation of work, the client agreed to a contractual mechanism (“Funding Deed”) in 2016 providing funding in the form of an interim contract price adjustment to JKC and consented to settlement of subcontractor claims as of that date related to the cost-reimbursable scope. In 2017, additional settlements pertaining to suppliers and subcontractors under the cost-reimbursable scope of the contract were presented to the client, and the client consented to payment to JKC but reserved its project estimates-at-completion significant revenues associatedcontractual rights. The Settlement Agreement fully resolved these matters.
•JKC was entitled to an amount of profit and overhead (“TRC Fee”) which was a fixed percentage of the target reimbursable costs ("TRC") under the reimbursable component of the contract which was to be agreed by the Parties. The Parties were unable to reach agreement. The Settlement Agreement fully resolved this matter.
•Claims for incurred costs related to scope increases and other factors for which JKC believed it is entitled to reimbursement under the contract.
In connection with preliminary settlement discussions, the Company recorded a non-cash charge to equity in earnings of unconsolidated affiliates in the amount of $193 million in the quarter ended June 30, 2021, which reflected KBR’s proportionate share of the unpaid, unapproved change orders and claims. This non-cash charge does not impact JKC’s pursuit of subcontractor claims againstassociated with the client as well as estimated recoveriescombined cycle power. In the quarter ended September 30, 2021, KBR recorded an additional charge of claims against suppliers and subcontractors. The client has reserved their contractual rights on certain amounts previously funded to JKC and may seek recoveriesapproximately $10 million for its proportionate share of those amounts.final warranty items.
As part of the Settlement Agreement, KBR’s letters of credit were also reduced to $82 million from $164 million.
The Settlement Agreement does not impact pursuit of, or positions related to, JKC’s subcontractor claims associated with the combined cycle power plant, of which JKC incurred substantial costs to complete the power plant under the fixed-price portion of the Ichthys LNG contract. JKC believes these costs are recoverable from the Consortium who abandoned their contractual obligation to complete the power plant as the original subcontractor. We have initiated arbitrations and other legal proceedings to recover these costs which may take several years to resolve. As a result, we funded JKC our proportionate share of theJKC's capital requirements to complete the power plant as these legal proceedings progress.
As of December 31, 2019, we have made investment contributions to JKC of approximately $484 million to fund our proportionate share of the project execution activities on an inception-to-date basis. JKC's obligations to the client are guaranteed on a joint and several basis by the joint venture partners. Negotiations and legal proceedings with the client and the subcontractors are ongoing, the goal of which is to minimize these expected outflows. If we experience unfavorable outcomes associated with the various legal and commercial disputes, our total investment contributions could increase which could have a material adverse effect on our financial position and cash flows.
As of December 31, 2019, we had $164 million in letters of credit outstanding in support of performance and warranty guarantees provided to the client. The performance letter of credit expires upon provisional acceptance of the facility by the client and the warranty letter of credit expires upon the end of the warranty obligation.
U.K. pension obligation. We have recognized on our consolidated balance sheet a funding deficit of $277$88 million (measured as the difference between the fair value of plan assets and the projected benefit obligation)obligation as of December 31, 2021) for our frozen defined benefit pension plans. The total amounts of employer pension contributions paid for the year ended December 31, 20192021 were $45$46 million and primarily related to our defined benefit plan in the U.K. The funding requirements for our U.K. pension plan are determined based on the U.K. Pensions Act 1995. Annual minimum funding requirements are based on a binding agreement with the trustees of the U.K. pension plan that is negotiated on a triennial basis.basis which is slated to commence in 2021 and is required to be completed by April 2022. The binding agreement also includes other assurances and commitments regarding the business and assets that support the U.K. pension plan. We agreed to a new triennial agreement with the trustees of the U.K. pension plan in June 2019. Thecurrent agreement calls for minimum annual contributions of £33 million ($4345 million at current exchange rates) from 2019 throughuntil the next valuation.minimum funding requirements are finalized. In the future, pension funding may increase or decrease depending on changes in the levels of interest rates, pension plan asset return performance and other factors. A significant increase in our funding requirements for the U.K. pension plan could result in a material adverse impact on our financial position.
Senior Credit Facility
Information relating to our Credit Agreement and the Senior Credit Facility is described in Note 1412 "Debt and Other Credit Facilities" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part II, Item 7.
On February 7, 2020, we amended our Senior Credit Facility to, among other things, reduce the applicable margins and commitment fees associated with the various borrowings under the facility. Simultaneous with the amendment, we used proceeds from the new facility to refinance our outstanding borrowings resulting in an amended Senior Credit Facility that is comprised of a $500 million Revolver, a $500 million PLOC, a $275 million Term Loan A and a $520 million Term Loan B. In addition, the amendment extended the maturity dates with respect to the Revolver and the Term Loan A to February 7, 2025 and Term Loan B to February 7, 2027, and amended certain other provisions including the financial covenants.
Convertible Senior Notes
On November 15, 2018, we issued and sold $350 million of 2.50% Convertible Senior Notes due 2023 (the "Convertible Notes"). The Convertible Notes bear interest at 2.50% per year and interest is payable on May 1 and November 1 of each year, beginning on May 1, 2019. The Convertible Notes mature on November 1, 2023 and may not be redeemed by us prior to maturity. The indenture governing the Convertible Notes includes customary terms and covenants, including certain events of default after which the Convertible Notes may be due and payable immediately. Information relating to our Convertible Senior Notes is described in Note 1412 "Debt and Other Credit Facilities" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part II, Item 7.
Nonrecourse Project Finance DebtConvertible Senior Notes
Information relating to our nonrecourse project debtConvertible Senior Notes is described in Note 1412 "Debt and Other Credit Facilities" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part II, Item 7.
Nonrecourse Project Finance Debt
Information relating to our nonrecourse project debt is described in Note 12 "Debt and Other Credit Facilities" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part II, Item 7.
Off-Balance Sheet Arrangements
Letters of credit, surety bonds and guarantees. In the ordinary course of business, we may enter into various arrangements providing financial or performance assurance to customers on behalf of certain consolidated and unconsolidated subsidiaries, joint ventures and other jointly executed contracts. Such off-balance sheet arrangements include letters of credit, surety bonds and corporate guarantees to support the creditworthiness or project execution commitments of these entities and typically have various expiration dates ranging from mechanical completion of the project being constructed to a period beyond completion in certain circumstances such as for warranties. We may also guarantee that a project, once completed, will achieve specified performance standards. If the project subsequently fails to meet guaranteed performance standards, we may incur additional costs, pay liquidated damages or be held responsible for the costs incurred by the client to achieve the required performance standards. The potential amount of future payments that we could be required to make under an outstanding performance arrangement is typically the remaining estimated cost of work to be performed by or on behalf of third parties. For cost reimbursable contracts, amounts that may become payable pursuant to guarantee provisions are normally recoverable from the client for work performed under the contract. For lump-sum or fixed-price contracts, the performance guarantee amount is the cost to complete the contracted work, less amounts remaining to be billed to the client under the contract. Remaining billable amounts could be greater or less than the
cost to complete the project. If costs exceed the remaining amounts payable under the contract, we may have recourse to third parties, such as owners, subcontractors or vendors for claims.
In our joint venture arrangements, the liability of each partner is usually joint and several. This means that each joint venture partner may become liable for the entire risk of performance guarantees provided by each partner to the customer. Typically each joint venture partner indemnifies the other partners for any liabilities incurred in excess of the liabilities the other party is obligated to bear under the respective joint venture agreement. We are unable to estimate the maximum potential amount of future payments that we could be required to make under outstanding performance guarantees related to joint venture projects due to a number of factors, including but not limited to, the nature and extent of any contractual defaults by our joint venture partners, resource availability, potential performance delays caused by the defaults, the location of the projects and the terms of the related contracts. See “Item 1A. Risk Factors” contained in Part I of this Annual Report on Form 10-K for information regarding our fixed-price contracts and operations through joint ventures and partnerships.
FinancialIn certain limited circumstances, we enter into financial guarantees made in the ordinary course of business, in certain limited circumstances, are entered into with financial institutions and other credit grantors, andwhich generally obligate us to make payment in the event of a default by the borrower. These arrangements generally require the borrower to pledge collateral to support the fulfillment of the borrower’s obligation. We account for both financial and performance guarantees at fair value at issuance in accordance with ASC 460-10 Guarantees and, as of December 31, 2019,2021, we had no material guarantees of the work or obligations of third parties recorded.
As of December 31, 2021, we had $1 billion in a committed line of credit under the Senior Credit Facility and $522
We have both committed andmillion of uncommitted lines of credit available to be usedsupport the issuance of letters of credit. As of December 31, 2021, with respect to our Senior Credit Facility, we had $364 million of outstanding borrowings previously issued to fund the acquisitions of Centauri and Frazer-Nash and $48 million of outstanding letters of credit. With respect to our $522 million of uncommitted lines of credit, we had utilized $229 million for letters of credit. Ourcredit as of December 31, 2021. The total remaining capacity underof these committed and uncommitted lines of credit was approximately $1.4 billion of which $325 million had been utilized for outstanding letters of credit as of December 31, 2019.$880 million. Information relating to our letters of credit is described in Note 1412 "Debt and Other Credit Facilities" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part II, Item 7. Other than as discussed in this report, we have not engaged in any material off-balance sheet financing arrangements through special purpose entities.
Contractual obligationsObligations and commitmentsCommitments
Significant contractual obligations and commercial commitments as of December 31, 20192021 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due |
Dollars in millions | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Total |
Debt obligations | $ | 27 |
| | $ | 27 |
| | $ | 27 |
| | $ | 477 |
| | $ | 8 |
| | $ | 716 |
| | $ | 1,282 |
|
Interest (a) | 68 |
| | 66 |
| | 64 |
| | 52 |
| | 40 |
| | 13 |
| | 303 |
|
Nonrecourse project finance debt | 11 |
| | 5 |
| | 1 |
| | 1 |
| | — |
| | — |
| | 18 |
|
Operating leases | 54 |
| | 44 |
| | 37 |
| | 33 |
| | 25 |
| | 119 |
| | 312 |
|
Pension funding obligation (b) | 47 |
| | 43 |
| | 43 |
| | 43 |
| | 43 |
| | 187 |
| | 406 |
|
Purchase obligations (c) | 30 |
| | 17 |
| | 13 |
| | 8 |
| | 2 |
| | 2 |
| | 72 |
|
Total (d) | $ | 237 |
| | $ | 202 |
| | $ | 185 |
| | $ | 614 |
| | $ | 118 |
| | $ | 1,037 |
| | $ | 2,393 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due |
Dollars in millions | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total |
Debt obligations | $ | 121 | | | $ | 366 | | | $ | 27 | | | $ | 27 | | | $ | 379 | | | $ | 736 | | | $ | 1,656 | |
Interest (a) | 70 | | | 68 | | | 62 | | | 61 | | | 57 | | | 22 | | | 340 | |
Operating leases | 55 | | | 51 | | | 42 | | | 36 | | | 25 | | | 85 | | | 294 | |
Finance leases | 9 | | | 6 | | | 4 | | | 2 | | | — | | | — | | | 21 | |
Pension funding obligation (b) | 46 | | | 45 | | | 45 | | | 45 | | | 45 | | | 103 | | | 329 | |
Purchase obligations (c) | 35 | | | 12 | | | — | | | — | | | — | | | — | | | 47 | |
Deferral of tax payments (d) | 30 | | | — | | | — | | | — | | | — | | | — | | | 30 | |
Total (e) | $ | 366 | | | $ | 548 | | | $ | 180 | | | $ | 171 | | | $ | 506 | | | $ | 85 | | | $ | 2,717 | |
| |
(a) | Determined based on long-term debt borrowings outstanding at the end of 2019 using the interest rates in effect for the individual borrowings as of December 31, 2019, including the effects of interest rate swaps. The payments due for interest reflect the cash interest that will be paid, which includes interest on outstanding borrowings and commitment fees. These amounts exclude the amortization of discounts or debt issuance costs. |
| |
(b) | Included in our pension funding obligations are payments related to our agreement with the trustees of our U.K. pension plan. The agreement for this plan calls for minimum annual contributions of £33 million ($43 million at current exchange rates) from 2020 through the next valuation. |
| |
(c) | In the ordinary course of business, we enter into commitments to purchase software and related maintenance, materials, supplies and similar items. The purchase obligations disclosed above do not include purchase obligations that we enter into with vendors in the normal course of business that support direct project costs on existing contracting arrangements with our customers. We expect to recover such obligations from our customers. |
| |
(d) | We have excluded uncertain tax positions totaling $97 million as of December 31, 2019. The ultimate timing of settlement of these obligations cannot be determined with reasonable assurance. See Note 15 to our consolidated financial statements for further discussion on income taxes. Additionally, we have excluded our proportionate share of obligations totaling $158 million as of December 31, 2019 related to the Funding Deeds on the Ichthys LNG Project. The amounts funded to JKC by the client are subject to refund to the extent they remain unresolved at December 31, 2020. See Note 8 to our consolidated financial statements for further discussion. |
(a)Determined based on long-term debt borrowings outstanding at the end of 2021 using the interest rates in effect for the individual borrowings as of December 31, 2021, including the effects of interest rate swaps. The payments due for interest reflect the cash interest that will be paid, which includes interest on outstanding borrowings and commitment fees. These amounts exclude the amortization of discounts or debt issuance costs. (b)Included in our pension funding obligations are payments related to our agreement with the trustees of our U.K. pension plan. The agreement for this plan calls for minimum annual contributions of £33 million ($45 million at current exchange rates) from 2022 through the next valuation.
(c)In the ordinary course of business, we enter into commitments to purchase software and related maintenance, materials, supplies and similar items. The purchase obligations disclosed above do not include purchase obligations that we enter into with vendors in the normal course of business that support direct project costs on existing contracting arrangements with our customers. We expect to recover such obligations from our customers.
(d)The Cares Act permitted deferral of the employer portion of payroll taxes through December 31, 2020 of which 50% was due by December 31, 2021 and the remaining 50% is due by December 31, 2022. We paid $30 million in 2021 and the remaining $30 million is expected to be paid in the fourth quarter of 2022.
(e)We have excluded uncertain tax positions totaling $89 million as of December 31, 2021. The ultimate timing of settlement of these obligations cannot be determined with reasonable assurance. See Note 13 to our consolidated financial statements for further discussion on income taxes.
Transactions with Joint Ventures
In the normal course of business, we form incorporated and unincorporated joint ventures to execute projects. In addition to participating as a joint venture partner, we often provide engineering, procurement, construction, operations or maintenance services to the joint venture as a subcontractor. Where we provide services to a joint venture that we control and therefore consolidate for financial reporting purposes, we eliminate intercompany revenues and expenses on such transactions. In situations where we account for our interest in the joint venture under the equity method of accounting, we do not eliminate any portion of our subcontractor revenues or expenses.expenses, however, we recognize profit on our subcontractor scope of work only to the extent the joint venture's scope of work to the end customer is complete. We recognize profit over time on our services provided to joint ventures that we consolidate and joint ventures that we record under the equity method of accounting. See Note 1210 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information. The information discussed therein is incorporated by reference into this Part II, Item 7.
Recent Accounting Pronouncements
Information relating to recent accounting pronouncements is described in Note 2523 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part II, Item 7.
U.S. Government Matters
Information relating to U.S. government matters commitments and contingencies is described in Note 1615 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part II, Item 7.
Legal Proceedings
Information relating to various commitments and contingencies is described in Notes 166, 14 and 1715 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part II, Item 7.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which have been prepared in conformity with U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the determination of financial positions, results of operations, cash flows and related disclosures. Our significant accounting policies are described in Note 1 to our consolidated financial statements. The following discussion is intended to highlight and describe those accounting policies that are especially critical to the preparation of our consolidated financial statements and to provide a better understanding of our significant accounting estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements. Significant accounting estimates are important to the representation of our financial position and results of operations and involve our most difficult, subjective or complex judgments. We base our estimates on historical experience and various other assumptions we believe to be reasonable according to the current facts and circumstances through the date of the issuance of our financial statements.
Contract Revenue. We adopted ASC Topic 606 Revenue from Contracts with Customers on January 1, 2018, including the subsequent ASUs that amended and clarified the related guidance. Our policy on revenue recognition is provided in Note 1 to our consolidated financial statements for the year ended December 31, 2019.2021. We recognize revenue on substantially all of our engineering, procurement and construction contracts and many of our services contracts over time, as performance obligations are satisfied, due to the continuous transfer of control to the customer. Contracts that include engineering, procurement and construction servicesOur contracts are generally accounted for as a single performance obligation and are not segmented between types of services provided. We recognize revenue on those contracts over time using the cost-to-cost method, based primarily on contract costs incurred to date compared to total estimated contract costs at completion. Contract costs include all direct materials, labor and subcontractors costs and indirect costs related to contract performance. We believe this method is the most accurate measure of contract performance because it directly measures the value of the goods and services transferred to the customer. For all other contracts where we have the right to consideration from the customer in an amount that corresponds directly with the value received by the customer based on our performance to date, we recognizedrecognize revenue when services are performed and contractually billable.
The cost-to-cost method of revenue recognition requires us to prepare estimates of cost to complete for contracts in progress. Due to the nature of the work performed on many of our performance obligations, the estimates of total revenue and cost at completion is complex, subject to many variables and require significant judgment. In making such estimates, judgments are required to evaluate contingencies such as weather, potential variances in schedule and the cost of materials, labor cost and productivity, the impact of change orders, liability claims, contract disputes and achievement of contractual performance standards. As a significant change in one or more of these estimates could affect the profitability of our contracts, we routinely review and update our significant contract estimates through a disciplined project review process in which management reviews the progress and execution of our performance obligations and estimates at completion. We have a long history of working with multiple types of projects and in preparing cost estimates. However, there are many factors that impact future cost as outlined in “Item 1A. Risk Factors” contained in Part I of this Annual Report on Form 10-K. These factors can affect the accuracy of our estimates and materially impact our future reported earnings. Changes in total estimated contract costs and losses, if any, are recognized on a cumulative catch-up basis in the period in which the changes are identified at the contract level. Such changes in contract estimates can result in the recognition of revenue in a current period for performance obligations which were satisfied or partially satisfied in a prior period. Changes in contract estimates may also result in the reversal of previously recognized revenue if the current estimate differs from the previous estimate.
It is common for our contracts to contain variable consideration in the form of incentive fees, performance bonuses, award fees, liquidated damages or penalties.penalties that may increase or decrease the transaction price. Other contract provisions also give rise to variable consideration such as unapproved change orders and claims, and on certain contracts, index-based price adjustments. We estimate the amount of variable consideration at the most likely amount we expect to be entitled and is includedinclude in the transaction price when it is probable that a significant reversal of cumulative revenue recognized will not occur. Our estimates of variable consideration and determination of whether to include
such amounts in the transaction price are based largely on our assessment of legal enforceability, anticipated performance and any other information (historical, current or forecasted) that is reasonably available to us. Variable consideration associated with claims and unapproved change orders is included in the transaction price only to the extent of costs incurred. We recognize claims against suppliers and subcontractors as a reduction in recognized costs when enforceability is established by the contract and the amounts are reasonably estimatedestimable and probable of recovery. Reductions in costs are recognized to the extent of the lesser of the amounts management expects to recover or actual costs incurred. As of December 31, 20192021 and 2018,2020, we had recorded $978$426 million and $973 million,$1.0 billion, respectively, of claim revenue and subcontractor recoveries for costs incurred to date and such costs are included in the our estimates at completion. See Note 86 to our consolidated financial statements for our discussion on unapproved change orders and claims.
Purchase Price Allocation. We allocate the purchase price of an acquired business to the identifiable assets and liabilities of the acquiree based on estimated fair values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill. Fair value estimates are based on the assumptions management believes a market participant would use in pricing the asset and are developed using widely accepted valuation techniques such as discounted cash flows. When determining the fair value of the assets and liabilities of an acquired business, we make judgments and estimates using all available information to us including, but not limited to, quoted market prices, carrying values, expected future cash flows, which includes consideration of future growth rates and margins, attrition rates, future changes in technology and brand awareness, loyalty and position and discount rates. We engage third-party appraisal firms when appropriate to assist in the fair value determination of intangible assets. The purchase price allocation recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available.
Goodwill Impairment Testingand Intangible Assets. Goodwill is tested annually for possible impairment as of October 1 of each fiscal year, and on an interim basis when indicators of possible impairment exist such as negative financial performance, significant changes in legal factors or business climate and industry trend, among other things.exist. For purposes of impairment testing, goodwill is assigned to the applicable reporting units based on our current reporting structure. We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Qualitative factors assessed for each of the applicable reporting units include, but are not limited to, changes in macroeconomic conditions, industry and market considerations, cost factors, discount rates, competitive environments and financial performance of the reporting units. If the qualitative assessment indicates that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, a quantitative test for goodwillis required.
We also have the option to proceed directly to the quantitative test. Under the quantitative impairment attest, the estimated fair value of each reporting unit is compared to its carrying value, including goodwill. If the carrying value of the reporting unit level asincluding goodwill exceeds its fair value, an impairment charge equal to the excess would be recognized, up to a maximum amount of October 1goodwill allocated to that reporting unit. We can resume the qualitative assessment in any subsequent period for any reporting unit.
For 2021, management performed a qualitative impairment assessment of each fiscal year usingour reporting units, of which there were no indications that it was more likely than not that the fair value of our reporting units were less than their respective carrying values. As such, a quantitative goodwill test was not required, and no goodwill impairment was recognized in 2021.
For the 2020 annual goodwill impairment test, we utilized the two-step process that involves comparingto compare the estimated fair value of each reporting unit to the to its carrying value including goodwill.resulting in goodwill impairment of $99 million. The fair values of reporting units were determined using a combination of two methods, one utilizing market revenue and earnings multiples (the market approach) and the other derived from discounted cash flow models with estimated cash flows based on internal forecasts of revenues and expenses over a specified period plus a terminal value (the income approach).
For the 2019 annual goodwill impairment test under Under the market approach, we estimated fair value by applying earnings and revenue market multiples ranging from 8.034.31 to 15.5111.59 times earnings and 0.560.31 to 2.222.09 times revenue. Under the income approach, we estimated fair value by discounting each reporting unit’s estimated future cash flows using a weighted-average cost of capital reflecting current market conditions and the risk profile of the reporting unit. To arrive at our future cash flows, we used estimates of economic and market assumptions, including growth rates in revenues, costs, tax rates and future expected changes in operating margins and cash expenditures that are consistent with changes in our business strategy. The risk-adjusted discount rates applied to our future cash flows under the income approach in 20192020 ranged from 10.1%9.0% to 11.6%10.2%. We believe these two approaches are appropriate valuation techniques and we generally
weight the two resulting values equally as an estimate of a reporting unit's fair value for the purposes of our impairment testing. However, we may weigh one value more heavily than the other when conditions merit doing so. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements. The fair value derived from the weighting of these two methods provides appropriate valuations that, in the aggregate, reasonably reconcile to our market capitalization, taking into account observable control premiums.
In additionIntangible assets with indefinite lives are not amortized but are subject to the earnings and revenue multiples and the discount rates disclosed above, certain other judgments and estimates are used in our goodwillannual impairment test. If market conditions change compared to those used in our market approach,tests or if actual future resultson an interim basis when indicators of operations fall below the projections used in the income approach, our goodwill could becomepotential impairment exist. An intangible asset with an indefinite life is impaired in the future.
The fair value for a reporting unit in our ES business segment with goodwill of $94 million, exceededif its carrying value by 266% basedexceeds its fair value. During the year ended December 31, 2021, there were no triggering events identified. During the year ended December 31, 2020, we recognized an impairment loss on projected growth rates and other market inputs includingindefinite-lived intangible assets associated with certain trade names acquired through previous business combinations of our legacy ES business of approximately $11 million.
Intangible assets with finite lives are amortized on a straight-line basis over the timinguseful life of significant, long-term project awards by its customers. The fairthose assets, ranging from 1 year to 25 years. We perform an impairment test of finite-lived intangibles whenever events or changes in circumstances indicate their carrying value may be impaired. If events or changes in circumstances indicate the carrying value of this reporting unit anda finite-lived intangible may be impaired, the related underlying assumptions are sensitivesum of the undiscounted future cash flows expected to result from the use of the asset group would be compared to the riskasset group’s carrying value. If the asset group’s carrying amount exceed the sum of the undiscounted future variances due to competitive market conditions and reporting unit project execution. It is possible that changes in market conditions, revenue growth rates and profitability, and other assumptions used in estimatingcash flows, we would determine the fair value of this reporting unit could change, resulting in possiblethe asset group and record an impairment of goodwill in the future. We determined that the fair value of our remaining reporting units substantially exceeded their respective carrying values.loss.
Deferred Taxes, Valuation Allowances and Tax Contingencies. As discussed in Note 1513 to our consolidated financial statements, deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. We record a valuation allowance to reduce certain deferred tax assets to amounts that are more-likely-than-notmore likely than not to be realized. We evaluate the realizability of our deferred tax assets by assessing the valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include our forecast of the timing and character of future taxable income exclusive of reversing temporary differences and carryforwards, future reversals of existing taxable temporary differences, income available from carryback years and available tax planning strategies that could be implemented to realize the net deferred tax assets.
We consider both positive and negative evidence when evaluating the need for a valuation allowance on our deferred tax assets in accordance with ASC 740. Available evidence includes historical financial information supplemented by currently available information about future years. Generally, historical financial information is more objectively verifiable than projections of future income and is therefore given more weight in our assessment. We consider cumulative losses in the most recent twelve quarters to be significant negative evidence that is difficult to overcome in considering whether a valuation allowance is required. Conversely, we consider a cumulative income position over the most recent twelve quarters, to be significant positive evidence that a valuation allowance may not be required. Changes in the amount, timing and character of our forecasted taxable income could have a significant impact of our ability to utilize deferred tax assets and related valuation allowance.
We believe there is a reasonable possibility that within the next 12 months sufficient positive evidence may become available to allow us to conclude that a significant portion of the valuation allowance will no longer be needed. The release of the valuation allowance could be in the range of $15 million to $25 million and result in a decrease to income tax expense. The timing of any release is dependent upon the potential HomeSafe contract booking.
Our ability to utilize the unreserved foreign tax credit carryforwards is based on our ability to generate income from foreign sources of approximately $824$662 million prior to their expiration whereas our ability to utilize other net deferred tax assets exclusive of those associated with indefinite-lived intangible assets is based on our ability to generate U.S. forecasted taxable income of approximately $432$610 million. Changes in our forecasted taxable income, in the appropriate character and source as well as jurisdiction, could affect the ultimate realization of deferred tax assets.
Income tax positions must meet a more-likely-than-notmore likely than not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-notmore likely than not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-notmore likely than not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. We recognize potential interest and penalties related to unrecognized tax benefits in income tax expense.
Legal, Investigation and Other Contingent Matters. We record liabilities for loss contingencies when it is probable that a liability has been incurred and the amount is reasonably estimable. We provide disclosure when there is a reasonable possibility that the ultimate loss will exceed our recorded liability by a material amount or if the loss is not reasonably estimable but is expected to be material to our financial statements. Generally, our estimates related to these matters are developed in
consultation with internal and external legal counsel. Our estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. The precision of these estimates and the likelihood of future changes depend on a number of underlying assumptions and a range of possible outcomes. When possible, we attempt to resolve these matters through settlements, mediation and arbitration proceedings. If the actual settlement costs, final judgments or fines differ from our estimates, our future financial results may be materially and adversely affected. We record adjustments to our initial estimates of these types of contingencies in the periods when the change in estimate is identified. All legal expenses associated with these matters are expensed as incurred. See Notes 166, 14 and 1715 to our consolidated financial statements for further discussion of our significant legal, investigation and other contingent matters.
Pensions. Our pension benefit obligations and expenses are calculated using actuarial models and methods. Two of theThe more critical assumptionsassumption and estimatesestimate used in the actuarial calculations areis the discount rate for determining the current value of benefit obligations and the expected rate of return on plan assets.obligations. Other assumptions and estimates used in determining benefit obligations and plan expenses include expected rate of return on plan assets, inflation rates and demographic factors such as retirement age, mortality and turnover. These assumptions and estimates are evaluated periodically and are updated accordingly to reflect our actual experience and expectations.
The discount rate used to determine the benefit obligations was computed using a yield curve approach that matches plan specific cash flows to a spot rate yield curve based on high quality corporate bonds. The expected long-term rate of return on assets was determined by a stochastic projection that takes into account asset allocation strategies, historical long-term performance of individual asset classes, an analysis of additional return (net of fees) generated by active management, risks using standard deviations and correlations of returns among the asset classes that comprise the plans' asset mix. Plan assets are comprised primarily of equity securities, fixed income funds and securities, hedge funds, real estate and other funds. As we have both domestic and international plans, these assumptions differ based on varying factors specific to each particular country or economic environment.
The discount rate utilized to calculate the projected benefit obligation at the measurement date for our U.S. pension plan decreasedincreased to 2.89%2.45% at December 31, 20192021 from 3.98%2.00% at December 31, 2018.2020. The discount rate utilized to determine the projected benefit obligation at the measurement date for our U.K. pension plan, which constitutes 96%97% of all plans, decreasedincreased to 2.05%1.80% at December 31, 20192021 from 2.90%1.40% at December 31, 2018.2020. Our expected long-term rates of return on plan assets utilized at the measurement date increaseddecreased to 6.09%5.19% from 6.01%5.72% for our U.S. pension plans and decreasedincreased to 5.09%4.67% from 5.20%3.70% for our U.K. pension plans, for the years ended December 31, 20192021 and 2018,2020, respectively.
The following table illustrates the sensitivity to changes in certain assumptions, holding all other assumptions constant, for our pension plans:
| | | | | | | | | | | | | | | | | | | | | | | |
| Effect on |
| Pretax Pension Cost in 2022 | | Pension Benefit Obligation at December 31, 2021 |
Dollars in millions | U.S. | | U.K. | | U.S. | | U.K. |
25-basis-point decrease in discount rate | $ | — | | | $ | — | | | $ | 2 | | | $ | 88 | |
25-basis-point increase in discount rate | $ | — | | | $ | — | | | $ | (2) | | | $ | (81) | |
25-basis-point decrease in expected long-term rate of return | $ | — | | | $ | 5 | | | N/A | | N/A |
25-basis-point increase in expected long-term rate of return | $ | — | | | $ | (5) | | | N/A | | N/A |
|
| | | | | | | | | | | | | | | |
| Effect on |
| Pretax Pension Cost in 2020 | | Pension Benefit Obligation at December 31, 2019 |
Dollars in millions | U.S. | | U.K. | | U.S. | | U.K. |
25-basis-point decrease in discount rate | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | 90 |
|
25-basis-point increase in discount rate | $ | — |
| | $ | — |
| | $ | (2 | ) | | $ | (86 | ) |
25-basis-point decrease in expected long-term rate of return | $ | — |
| | $ | 4 |
| | N/A |
| | N/A |
|
25-basis-point increase in expected long-term rate of return | $ | — |
| | $ | (4 | ) | | N/A |
| | N/A |
|
Unrecognized actuarial gains and losses are generally recognized using the corridor method over a period of approximately 2522 years, which represents a reasonable systematic method for amortizing gains and losses for the employee group. Our unrecognized actuarial gains and losses arise from several factors, including experience and assumption changes in the obligations and the difference between expected returns and actual returns on plan assets. The difference between actual and expected returns is deferred as an unrecognized actuarial gain or loss on our consolidated statement of comprehensive income (loss) and is recognized as a decrease or an increase in future pension expense. Our pretax unrecognized net actuarial loss in accumulated other comprehensive loss at December 31, 20192021 was $878$787 million, of which $25$26 million is expected to be recognized as a component of our expected 20202022 pension expense compared to $18$33 million in 2019.2021.
The actuarial assumptions used in determining our pension benefits may differ materially from actual results due to changing market and economic conditions, changes in the legislative or regulatory environment, higher or lower withdrawal rates and longer or shorter life spans of participants. While we believe that the assumptions used are appropriate, differences in actual experience, expectations or changes in assumptions may materially affect our financial position or results of operations.
Our actuarial estimates of pension expense and expected return on plan assets are discussed in Note 1311 in the accompanying consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Financial Market Risks.Risk. Cash and equivalents are deposited with major banks globally. Such deposits are placed with high quality institutions andthroughout the amounts invested in any single institution are limited to the extent possible in order to minimize concentration of counterparty credit risk.world. We invest excess cash and equivalents in short-term securities, primarily time deposits and money market funds, which carry a fixed rate of return. We have not incurred any credit risk losses related to deposits of our cash and equivalents.
Foreign Currency Risk. WeBecause of the global nature of our business, we are exposed to market risk associated with changes in foreign currency exchange rates primarily related to operations outside of the U.S.rates. We attempthave historically attempted to limit exposure to foreign currency fluctuations in most of these contracts through provisions requiring the client to pay us in currencies corresponding to the currency in which cost is incurred. In addition to this natural hedge, we may use derivative instruments such as foreign exchange forward contracts and options to hedge material exposures ifwhen forecasted foreign currency revenues and costs are not denominated in the same currency and ifwhen efficient markets exist. These derivatives are generally designated as cash flow hedges and are carried at fair value. We do not enter into derivative financial instruments for trading purposes or make speculative investments in foreign currencies. We recorded a net loss of $8 million for the year ended December 31, 2021, and a net gain of $4 million and a net loss of $9 million and $11 million related to the impact of our hedging activities associated with our operating exposures in "Other non-operating income (loss)" on our consolidated statements of operations for the years ended December 31, 2020 and 2019 2018in other non-operating income (expense) on our consolidated statements of operations. The net loss of $8 million during the year ended December 31, 2021 consisted primarily of foreign currency losses of approximately $7 million on certain intercompany balance positions denominated in various currencies and 2017, respectively.an additional $1 million loss related to changes in the fair value of balance sheet hedges.
We also use derivative instruments, such as foreign exchange forward contracts, to hedge foreign currency risk related to monetarynon-functional currency assets and liabilities denominated in non-functional currencies on our consolidated balance sheets. Each period, these balance sheet hedges are marked to market
through earnings and the change in their fair value is largely offset by remeasurement of the underlying assets and liabilities. The fair value of these derivatives was not material to our consolidated balance sheet for the periods presented. For more information, see Note 2322 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part II, Item 7A.
Interest Rate Risk. We are exposed to market risk for changes in interest rates for the Revolver and term loan borrowings under ourthe Senior Credit Facility. We had no$364 million of borrowings outstanding under the revolving credit facilityRevolver to partially fund the acquisitions of Centauri and $932Frazer-Nash and $952 million outstanding under the term loan portions of ourthe Senior Credit Facility as of December 31, 2019.2021. Borrowings under the Senior Credit Facility bear interest at variable rates as described in Note 1412 to our consolidated financial statements.
We manage interest rate exposure by entering into interest rate swap agreements wherepursuant to which we agree to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated on an agreed-upon notional principal amount. OnIn October 10, 2018, we entered into interest rate swap agreements covering $500 million of notional value of our outstanding term loans. Under these swap agreements, we receive a one month LIBOR rate and pay an average monthly fixed rate of 3.055% for the term of the swaps whichthat expire in September 2022. In March 2020, we entered into additional swap agreements covering notional value of $400 million of our outstanding loans which are effective beginning October 2022. Under these swap agreements, we will receive a one-month LIBOR and pay an average monthly fixed rate of 0.965% for the term of the swaps that expire in January 2027. The swap agreements were designated as a cash flow hedgehedges at inception in accordance with ASC Topic 815 Accounting for Derivative and Hedging Transactions. The total fair value of these derivative instruments was a net liability of approximately $21$3 million as of December 31, 2019.2021, of which $10 million is included in other current liabilities and $7 million is included in other assets
At December 31, 2019,2021, we had fixed rate debt aggregating $850 million$1.1 billion and variable rate debt aggregating $432$816 million, after taking into account the effects of the interest rate swaps. Our weighted average interest rate for the year ended December 31, 20192021 was 5.29%3.68%. If interest rates were to increase by 50 basis points, pre-tax interest expense would increase by approximately $2$4 million in the next twelve months net of the impact from our swap agreements, based on outstanding borrowings as of December 31, 2019.2021.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
KBR, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of KBR, Inc. and subsidiaries (the Company) as of December 31, 20192021 and 2018,2020, the related consolidated statements of operations, and comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2019,2021, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2019,2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019,2021, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 24, 202022, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for revenues as of January 1, 2018 due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment.judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinionopinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of variable consideration and estimated
Estimated costs at completion for long-term, fixed-price construction contracts
As discussed in Notes 1 and 86 to the consolidated financial statements, a portion of the Company recognizesCompany's revenue and equity in earnings of certain unconsolidated affiliates is derived from contracts with revenue recognized over time for substantially all construction contracts. The Company estimates variable consideration and includes such amounts in the transaction price when it is probable thatusing a significant reversalcost-based input measure of cumulative revenue recognized will not occur.progress. The Company measures progress toward completion using the cost-to-cost method, which measures progress as the ratio of (1) actual contract costs incurred to date to (2) the Company’s estimated costs at completion (EAC)(EACs). In estimating the transaction price, judgments are required to determine the amount of consideration for index-based price adjustments and claims against customers. In estimating the measure ofmeasuring progress, judgments are required to determine the estimated
amount of costs to complete contracts in progress, including costs for labor and subcontractor commitments, and contingencies, as well as probable recoveries from claims against suppliers and subcontractors.subcontractors.
We identified the evaluation of variable consideration and EACs for long-term, fixed-price construction contractsrevenues recognized using a cost-based input measure of progress as a critical audit matter. Evaluating the estimated amounts expected to be recovered from claims against customers, suppliers, and subcontractors required auditor judgment because the amounts are in dispute and the ultimate resolution of claims is uncertain. Evaluating the amount of consideration for index-based price adjustments involves auditor judgment given the variability and uncertainty associated with changes in the index. Evaluating the EACEACs for contracts in progress involves auditor judgment given the variability and uncertainty associated with (1) estimating costs, including labor and subcontractor commitments, and contingencies, to be incurred over a long-term contract period.period and (2) amounts expected to be recovered from the resolution of disputes related to claims against suppliers and subcontractors.
The following are the primary procedures we performed to address this critical audit matter includedmatter. We evaluated the following. Wedesign and tested the operating effectiveness of certain internal controls overrelated to the Company’s process for estimating (1) costs to complete long-term, fixed-price contracts in progress,at completion. This included controls over estimating costs, including costs forlabor and subcontractor commitments, and contingencies, as well as probable recoveries from claims against suppliers and subcontractors, (2) amounts expected to be recovered fromupon resolution of disputes related to claims against customers,suppliers and (3) index-based price adjustments.subcontractors. We evaluated the Company’s ability to estimate these amounts by comparing the Company’s previous estimates to actual results. We assessedevaluated the Company’s entitlement to and probable recovery from certain claims against customers, suppliers, and subcontractors by inspecting correspondence obtained from the Company’s external legal counsel. We involved professionals with specialized skills and knowledge who assisted in evaluating the Company’s estimated probable recoveryEACs for certain claims against customers, suppliers, and subcontractors by comparing the Company’s estimate against our independently developed range of probable recoveries. We evaluated the amount of consideration estimated for index-based price adjustments by comparing assumptions for the index to published data. We evaluated the EACcontracts by (1) obtaining and inspecting contractual documents with customers and subcontractors, (2) interviewing project personnel to gain an understanding of the status of project activities, and (3) obtaining and analyzing underlying documentation for a selection of costs in the EAC,EACs, including labor costs and subcontractor commitmentscommitments. We assessed the Company’s determination of entitlement to and contingencies.probability of recovery of certain claims against suppliers and subcontractors by inspecting correspondence obtained from the Company’s external legal counsel. We involved professionals with specialized skills and knowledge who assisted in evaluating the Company’s estimated recovery for certain claims against suppliers and subcontractors by comparing the Company’s estimate against our independently developed range of recoveries.
Evaluation
Fair value of the realizability of foreign tax credit carryforwardsacquired customer relationships
As discussed in Notes 1 and 15Note 4 to the consolidated financial statements, on October 20, 2021 the Company had $255acquired Frazer-Nash Consultancy Limited (Frazer-Nash) and accounted for the transaction as a business combination. As a result of the transaction, the Company recorded $79 million for customer relationships intangible assets. The estimated fair value of foreign tax credit carryforwards recorded as deferred tax assets as of December 31, 2019. The Company evaluates its ability to utilize foreign tax credit carryforwards by forecasting taxable foreign sourced income in the carryforward period and hasthis identifiable intangible asset was determined there isusing a greater than 50% likelihood that a portion of these foreign tax credit carryforwards will be used prior to their expiration dates. A valuation allowance is recorded against the remaining amount of foreign tax credit carryforwards expected to expire unutilized. Changes in the Company’s forecasted amount and timing of foreign sourced income and tax elections could have a significant impact on the Company’s ability to utilize these carryforwards and the related valuation allowance.discounted cash flow model.
We identified the evaluation of the realizabilityfair value of foreign tax credit carryforwardsacquired customer relationships in the Frazer-Nash business combination as a critical audit matter. Applying and evaluating the results of our procedures requiredThere was a high degree of auditor judgment relatedsubjectivity in evaluating the discounted future cash flows used to determine the fair value of the customer relationships including the forecasted amountsrevenue attributable to customer relationships, the attrition rate, and timingthe weighted-average cost of foreign sourced income as the valuation allowance is sensitive to changes in these assumptions. Additionally, specialized skills are necessary to evaluate tax elections.capital (WACC).
The following are the primary procedures we performed to address this critical audit matter includedmatter. We evaluated the following. Wedesign and tested the operating effectiveness of certain internal controls over the Company’s process for evaluating the realizability of foreign tax credit carryforwards, includingacquisition date valuation process. This included controls related to (1) the developmentdetermination of the fair value of the customer relationships, including the forecasted taxable foreign sourced income,revenue attributable to customer relationships, the attrition rate, and (2) tax elections.the WACC. We evaluated the forecasted revenue attributable to customer relationships by comparing it to the acquired entity’s actual historical results. To assess the Company’s ability to estimate taxable foreign sourced income,the acquired entity’s revenues, we compared the Company’s previoushistorical revenue forecasts to actual results. results for previous acquisitions.
We performed sensitivity analyses over attrition rate applied to the amount and timing of forecasted taxable foreign sourced incomerevenues attributable to customer relationships to assess the impact on utilization of foreign tax credit carryforwards prior to expiration. In addition, we involved federal and international income tax professionals with specialized skills and knowledge, who assisted in assessing the Company’s application of the relevant tax regulations applied to derive taxable foreign sourced income.
Assessment of the carrying value of goodwill within a reporting unit in the Energy Solutions business segment and a reporting unit in the Government Solutions business segment
As discussed in Notes 1 and 11 to the consolidated financial statements, the Company’s goodwill balance at December 31, 2019 was $1,265 million, of which $94 million and $889 million related to reporting units within the Energy Solutions and Government Solutions business segments, respectively. The Company performs goodwill impairment testing on an annual basis and whenever indicators of potential impairment exist. The estimated fair values of reporting units are determined based on internal forecasts of revenues and margins for each reporting unit over a specified period. No impairment was recorded for the year ended December 31, 2019.
We identified the assessment of the carrying value of goodwill for a reporting unit within the Energy Solutions business segment and a reporting unit within the Government Solutions business segment as a critical audit matter. A high degree of auditor judgment was required to evaluate forecasted revenue and margins as the reporting unit fair values are sensitive to changes in these assumptions.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s goodwill impairment assessment process, including controls related to development of forecasted revenue and margins. We compared the forecasted revenue and margins to (1) historical operating results, (2) remaining uncompleted performance obligations, and (3) public information available for specific customers’ intent to pursue certain projects. We performed sensitivity analyses over forecasted revenue and margins to assess theirits impact on the Company’s determination of the fair value of the reporting units. To assesscustomer relationships. In addition, we involved valuation professionals with specialized skills and knowledge who assisted in:
•evaluating the estimated annual attrition rate by comparing the selected attrition rate against relevant historical customer attrition data
•evaluating the WACC by developing an independent range of WACCs using publicly available market data and comparing the result to the Company’s ability to estimate reporting unit revenues and margins, we comparedWACC
•reconciling the Company’s historical cash flow forecasts to actual results. We tested the reconciliation of the fair value of the Company’s reporting unitsWACC to the market capitalizationweighted average return on assets and the internal rate of the Company.return.
/s/ KPMG LLP
We have served as the Company’s auditor since 2005.
Houston, Texas
February 24, 202022, 2022
KBR, Inc.
Consolidated Statements of Operations and Comprehensive Income
(In millions, except for per share data)
|
| | | | | | | | | | | |
| Years ended December 31, |
| 2019 | | 2018 | | 2017 |
| | | | | |
Revenues | $ | 5,639 |
| | $ | 4,913 |
| | $ | 4,171 |
|
Cost of revenues | (4,986 | ) | | (4,329 | ) | | (3,732 | ) |
Gross profit | 653 |
| | 584 |
| | 439 |
|
Equity in earnings of unconsolidated affiliates | 35 |
| | 79 |
| | 70 |
|
Selling, general and administrative expenses | (341 | ) | | (294 | ) | | (244 | ) |
Acquisition and integration related costs | (2 | ) | | (7 | ) | | — |
|
Asset impairment and restructuring charges | — |
| | — |
| | (6 | ) |
(Gain) loss on disposition of assets | 17 |
| | (2 | ) | | 5 |
|
Gain on consolidation of Aspire subcontracting entities | — |
| | 108 |
| | — |
|
Operating income | 362 |
| | 468 |
| | 264 |
|
Interest expense | (99 | ) | | (66 | ) | | (21 | ) |
Other non-operating income (loss) | 5 |
| | (6 | ) | | 4 |
|
Income before income taxes and noncontrolling interests | 268 |
| | 396 |
| | 247 |
|
(Provision) benefit for income taxes | (59 | ) | | (86 | ) | | 193 |
|
Net income | 209 |
| | 310 |
| | 440 |
|
Net income attributable to noncontrolling interests | (7 | ) | | (29 | ) | | (8 | ) |
Net income attributable to KBR | $ | 202 |
| | $ | 281 |
| | $ | 432 |
|
Net income attributable to KBR per share: | | | | | |
Basic | $ | 1.42 |
| | $ | 1.99 |
| | $ | 3.05 |
|
Diluted | $ | 1.41 |
| | $ | 1.99 |
| | $ | 3.05 |
|
Basic weighted average common shares outstanding | 141 |
| | 140 |
| | 141 |
|
Diluted weighted average common shares outstanding | 142 |
| | 141 |
| | 141 |
|
Cash dividends declared per share | $ | 0.32 |
| | $ | 0.32 |
| | $ | 0.32 |
|
| | | | | |
Net income | $ | 209 |
| �� | $ | 310 |
| | $ | 440 |
|
Other comprehensive income (loss), net of tax: | | | | | |
Foreign currency translation adjustments, net of taxes of $1, $(2) and $6 | (11 | ) | | (45 | ) | | 2 |
|
Pension and post-retirement benefits, net of taxes of $11, $(14) and $(27) | (62 | ) | | 68 |
| | 125 |
|
Changes in fair value of derivatives, net of taxes of $2, $3 and $0 | (4 | ) | | (11 | ) | | — |
|
Total other comprehensive income (loss) | (77 | ) | | 12 |
| | 127 |
|
Comprehensive income | 132 |
| | 322 |
| | 567 |
|
Less: Comprehensive income attributable to noncontrolling interests | (7 | ) | | (29 | ) | | (7 | ) |
Comprehensive income attributable to KBR | $ | 125 |
| | $ | 293 |
| | $ | 560 |
|
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 2021 | | 2020 | | 2019 |
| | | | | |
Revenues | $ | 7,339 | | | $ | 5,767 | | | $ | 5,639 | |
Cost of revenues | (6,533) | | | (5,101) | | | (4,986) | |
Gross profit | 806 | | | 666 | | | 653 | |
Equity in earnings (losses) of unconsolidated affiliates | (170) | | | 30 | | | 35 | |
Selling, general and administrative expenses | (393) | | | (335) | | | (341) | |
Acquisition and integration related costs | (12) | | | (9) | | | (2) | |
Goodwill impairment | — | | | (99) | | | — | |
Restructuring charges and asset impairments | (2) | | | (214) | | | — | |
Gain on disposition of assets and investments | 2 | | | 18 | | | 17 | |
| | | | | |
Operating income | 231 | | | 57 | | | 362 | |
Interest expense | (92) | | | (83) | | | (99) | |
Other non-operating income (expense) | (5) | | | 1 | | | 5 | |
Income (loss) before income taxes and noncontrolling interests | 134 | | | (25) | | | 268 | |
Provision for income taxes | (108) | | | (26) | | | (59) | |
Net income (loss) | 26 | | | (51) | | | 209 | |
Less: Net income attributable to noncontrolling interests | 8 | | | 21 | | | 7 | |
Net income (loss) attributable to KBR | $ | 18 | | | $ | (72) | | | $ | 202 | |
Net income (loss) attributable to KBR per share: | | | | | |
Basic | $ | 0.13 | | | $ | (0.51) | | | $ | 1.42 | |
Diluted | $ | 0.12 | | | $ | (0.51) | | | $ | 1.41 | |
Basic weighted average common shares outstanding | 140 | | | 142 | | | 141 | |
Diluted weighted average common shares outstanding | 145 | | | 142 | | | 142 | |
Cash dividends declared per share | $ | 0.44 | | | $ | 0.40 | | | $ | 0.32 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
See accompanying notes to consolidated financial statements.
KBR, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 2021 | | 2020 | | 2019 |
| | | | | |
Net income (loss) | $ | 26 | | | $ | (51) | | | $ | 209 | |
Other comprehensive income (loss): | | | | | |
Foreign currency translation adjustments | (4) | | | 23 | | | (12) | |
Pension and post-retirement benefits | 227 | | | (136) | | | (73) | |
Changes in fair value of derivatives | 31 | | | (13) | | | (6) | |
Other comprehensive income (loss) | 254 | | | (126) | | | (91) | |
Income tax (expense) benefit: | | | | | |
Foreign currency translation adjustments | (1) | | | 1 | | | 1 | |
Pension and post-retirement benefits | (44) | | | 26 | | | 11 | |
Changes in fair value of derivatives | (7) | | | 3 | | | 2 | |
Income tax (expense) benefit | (52) | | | 30 | | | 14 | |
Other comprehensive income (loss), net of tax | 202 | | | (96) | | | (77) | |
Comprehensive income (loss) | 228 | | | (147) | | | 132 | |
Less: Comprehensive income attributable to noncontrolling interests | 8 | | | 21 | | | 7 | |
Comprehensive income (loss) attributable to KBR | $ | 220 | | | $ | (168) | | | $ | 125 | |
See accompanying notes to consolidated financial statements.
KBR, Inc.
Consolidated Balance Sheets
(In millions, except share data)
| | | December 31, | | December 31, |
| 2019 | | 2018 | | 2021 | | 2020 |
| | | | | | | |
Assets | | | | Assets | |
Current assets: | | | | Current assets: | |
Cash and equivalents | $ | 712 |
| | $ | 739 |
| Cash and equivalents | $ | 370 | | | $ | 436 | |
Accounts receivable, net of allowance for doubtful accounts of $14 and $9 | 938 |
| | 927 |
| |
Accounts receivable, net of allowance for credit losses of $13 and $13 | | Accounts receivable, net of allowance for credit losses of $13 and $13 | 1,411 | | | 899 | |
Contract assets | 215 |
| | 185 |
| Contract assets | 224 | | | 178 | |
| Other current assets | 146 |
| | 108 |
| Other current assets | 147 | | | 121 | |
Total current assets | 2,011 |
| | 1,959 |
| Total current assets | 2,152 | | | 1,634 | |
Claims receivable | 59 |
| | 98 |
| |
Property, plant, and equipment, net of accumulated depreciation of $386 and $355 (including net PPE of $29 and $35 owned by a variable interest entity) | 130 |
| | 121 |
| |
Claims and accounts receivable | | Claims and accounts receivable | 30 | | | 30 | |
Property, plant, and equipment, net of accumulated depreciation of $431 and $419 (including net PPE of $19 and $24 owned by a variable interest entity) | | Property, plant, and equipment, net of accumulated depreciation of $431 and $419 (including net PPE of $19 and $24 owned by a variable interest entity) | 136 | | | 130 | |
Operating lease right-of-use assets | 175 |
| | — |
| Operating lease right-of-use assets | 158 | | | 154 | |
Goodwill | 1,265 |
| | 1,265 |
| Goodwill | 2,060 | | | 1,761 | |
Intangible assets, net of accumulated amortization of $184 and $151 | 495 |
| | 516 |
| |
Intangible assets, net of accumulated amortization of $291 and $228 | | Intangible assets, net of accumulated amortization of $291 and $228 | 708 | | | 683 | |
Equity in and advances to unconsolidated affiliates | 850 |
| | 724 |
| Equity in and advances to unconsolidated affiliates | 576 | | | 881 | |
Deferred income taxes | 236 |
| | 222 |
| Deferred income taxes | 226 | | | 297 | |
Other assets | 143 |
| | 147 |
| Other assets | 153 | | | 135 | |
Total assets | $ | 5,364 |
| | $ | 5,052 |
| Total assets | $ | 6,199 | | | $ | 5,705 | |
Liabilities and Shareholders’ Equity | | | | Liabilities and Shareholders’ Equity | | | |
Current liabilities: | | | | Current liabilities: | |
Accounts payable | $ | 572 |
| | $ | 546 |
| Accounts payable | $ | 1,026 | | | $ | 574 | |
Contract liabilities | 484 |
| | 463 |
| Contract liabilities | 313 | | | 356 | |
Accrued salaries, wages and benefits | 209 |
| | 221 |
| Accrued salaries, wages and benefits | 317 | | | 283 | |
Nonrecourse project debt | 11 |
| | 10 |
| Nonrecourse project debt | — | | | 5 | |
Operating lease liabilities | 39 |
| | — |
| Operating lease liabilities | 41 | | | 44 | |
Other current liabilities | 186 |
| | 179 |
| Other current liabilities | 178 | | | 193 | |
Total current liabilities | 1,501 |
| | 1,419 |
| Total current liabilities | 1,875 | | | 1,455 | |
Pension obligations | 277 |
| | 250 |
| Pension obligations | 88 | | | 381 | |
Employee compensation and benefits | 115 |
| | 109 |
| Employee compensation and benefits | 111 | | | 110 | |
Income tax payable | 92 |
| | 84 |
| Income tax payable | 95 | | | 96 | |
Deferred income taxes | 16 |
| | 27 |
| Deferred income taxes | 70 | | | 26 | |
Nonrecourse project debt | 7 |
| | 17 |
| Nonrecourse project debt | 2 | | | 2 | |
| Long term debt | 1,183 |
| | 1,226 |
| Long term debt | 1,852 | | | 1,584 | |
Operating lease liabilities | 192 |
| | — |
| Operating lease liabilities | 188 | | | 186 | |
| Other liabilities | 124 |
| | 202 |
| Other liabilities | 217 | | | 256 | |
Total liabilities | 3,507 |
| | 3,334 |
| Total liabilities | 4,498 | | | 4,096 | |
Commitments and Contingencies (Notes 6, 14 and 15) | | Commitments and Contingencies (Notes 6, 14 and 15) | 0 | | 0 |
KBR shareholders’ equity: | | | | KBR shareholders’ equity: | |
Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued | — |
| | — |
| |
Common stock, $0.001 par value 300,000,000 shares authorized, 178,330,201 and 177,383,302 shares issued, and 141,819,148 and 140,900,032 shares outstanding, respectively | — |
| | — |
| |
Preferred stock, $0.001 par value, 50,000,000 shares authorized, NaN issued | | Preferred stock, $0.001 par value, 50,000,000 shares authorized, NaN issued | — | | | — | |
Common stock, $0.001 par value 300,000,000 shares authorized, 179,983,586 and 179,087,655 shares issued, and 139,786,136 and 140,766,052 shares outstanding, respectively | | Common stock, $0.001 par value 300,000,000 shares authorized, 179,983,586 and 179,087,655 shares issued, and 139,786,136 and 140,766,052 shares outstanding, respectively | — | | | — | |
PIC | 2,206 |
| | 2,190 |
| PIC | 2,251 | | | 2,222 | |
Retained earnings | 1,441 |
| | 1,235 |
| Retained earnings | 1,260 | | | 1,305 | |
Treasury stock, 36,511,053 shares and 36,483,270 shares, at cost, respectively | (817 | ) | | (817 | ) | |
Treasury stock, 40,197,450 shares and 38,321,603 shares, at cost, respectively | | Treasury stock, 40,197,450 shares and 38,321,603 shares, at cost, respectively | (943) | | | (864) | |
AOCL | (987 | ) | | (910 | ) | AOCL | (881) | | | (1,083) | |
Total KBR shareholders’ equity | 1,843 |
| | 1,698 |
| Total KBR shareholders’ equity | 1,687 | | | 1,580 | |
Noncontrolling interests | 14 |
| | 20 |
| Noncontrolling interests | 14 | | | 29 | |
Total shareholders’ equity | 1,857 |
| | 1,718 |
| Total shareholders’ equity | 1,701 | | | 1,609 | |
Total liabilities and shareholders’ equity | $ | 5,364 |
| | $ | 5,052 |
| Total liabilities and shareholders’ equity | $ | 6,199 | | | $ | 5,705 | |
See accompanying notes to consolidated financial statements.
KBR, Inc.
Consolidated Statements of Shareholders’ Equity
(In millions) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dollars in millions | Total | | PIC | | Retained Earnings | | Treasury Stock | | AOCL | | NCI |
Balance at December 31, 2018 | $ | 1,718 | | | $ | 2,190 | | | $ | 1,235 | | | $ | (817) | | | $ | (910) | | | $ | 20 | |
Cumulative adjustment for the adoption of ASC 842, net of tax | 21 | | | — | | | 21 | | | — | | | — | | | — | |
Cumulative adjustment for the adoption of ASC 606 for our unconsolidated affiliates, net of tax | 25 | | | — | | | 25 | | | — | | | — | | | — | |
Adjusted balance at January 1, 2019 | 1,764 | | | 2,190 | | | 1,281 | | | (817) | | | (910) | | | 20 | |
| | | | | | | | | | | |
Share-based compensation | 12 | | | 12 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
Common stock issued upon exercise of stock options | 5 | | | 5 | | | — | | | — | | | — | | | — | |
Dividends declared to shareholders ($0.32/share) | (46) | | | — | | | (46) | | | — | | | — | | | — | |
Repurchases of common stock | (4) | | | — | | | — | | | (4) | | | — | | | — | |
Issuance of ESPP shares | 3 | | | (1) | | | — | | | 4 | | | — | | | — | |
| | | | | | | | | | | |
Investments by noncontrolling interests | 1 | | | — | | | — | | | — | | | — | | | 1 | |
Distributions to noncontrolling interests | (14) | | | — | | | — | | | — | | | — | | | (14) | |
| | | | | | | | | | | |
Net income | 209 | | | — | | | 202 | | | — | | | — | | | 7 | |
Other comprehensive income, net of tax | (77) | | | — | | | — | | | — | | | (77) | | | — | |
Balance at December 31, 2019 | $ | 1,853 | | | $ | 2,206 | | | $ | 1,437 | | | $ | (817) | | | $ | (987) | | | $ | 14 | |
Cumulative adjustment for the adoption of ASC 842, net of tax | (3) | | | — | | | (3) | | | — | | | — | | | — | |
| | | | | | | | | | | |
Adjusted balance at January 1, 2020 | 1,850 | | | 2,206 | | | 1,434 | | | (817) | | | (987) | | | 14 | |
| | | | | | | | | | | |
Share-based compensation | 12 | | | 12 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
Common stock issued upon exercise of stock options | 4 | | | 4 | | | — | | | — | | | — | | | — | |
Dividends declared to shareholders ($0.40/share) | (57) | | | — | | | (57) | | | — | | | — | | | — | |
Repurchases of common stock | (51) | | | — | | | — | | | (51) | | | — | | | — | |
Issuance of ESPP shares | 4 | | | — | | | — | | | 4 | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Distributions to noncontrolling interests | (4) | | | — | | | — | | | — | | | — | | | (4) | |
Other noncontrolling interests activity | (2) | | | — | | | — | | | — | | | — | | | (2) | |
Net income | (51) | | | — | | | (72) | | | — | | | — | | | 21 | |
Other comprehensive income, net of tax | (96) | | | — | | | — | | | — | | | (96) | | | — | |
Balance at December 31, 2020 | $ | 1,609 | | | $ | 2,222 | | | $ | 1,305 | | | $ | (864) | | | $ | (1,083) | | | $ | 29 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Share-based compensation | 12 | | | 12 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
Common stock issued upon exercise of stock options | 12 | | | 12 | | | — | | | — | | | — | | | — | |
Dividends declared to shareholders ($0.44/share) | (63) | | | — | | | (63) | | | — | | | — | | | — | |
Repurchases of common stock | (82) | | | — | | | — | | | (82) | | | — | | | — | |
Issuance of ESPP shares | 4 | | | 1 | | | — | | | 3 | | | — | | | — | |
| | | | | | | | | | | |
Investments by noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | |
Distributions to noncontrolling interests | (23) | | | — | | | — | | | — | | | — | | | (23) | |
Other | 4 | | | 4 | | | — | | | — | | | — | | | — | |
Net income | 26 | | | — | | | 18 | | | — | | | — | | | 8 | |
Other comprehensive income (loss), net of tax | 202 | | | — | | | — | | | — | | | 202 | | | — | |
Balance at December 31, 2021 | $ | 1,701 | | | $ | 2,251 | | | $ | 1,260 | | | $ | (943) | | | $ | (881) | | | $ | 14 | |
| | | | | | | | | | | |
|
| | | | | | | | | | | |
| December 31, |
| 2019 | | 2018 | | 2017 |
| | | | | |
Balance at January 1, | $ | 1,718 |
| | $ | 1,197 |
| | $ | 725 |
|
Cumulative effect of change in accounting policies, net of tax (Note 1) | 50 |
| | 144 |
| | — |
|
Adjusted balance at January 1, 2018 | 1,768 |
| | 1,341 |
| | 725 |
|
Acquisition of noncontrolling interest | — |
| | 69 |
| | (8 | ) |
Share-based compensation | 12 |
| | 10 |
| | 12 |
|
Tax benefit increase related to share-based plans | — |
| | 1 |
| | — |
|
Common stock issued upon exercise of stock options | 5 |
| | 2 |
| | — |
|
Dividends declared to shareholders | (46 | ) | | (44 | ) | | (45 | ) |
Repurchases of common stock | (4 | ) | | (3 | ) | | (53 | ) |
Issuance of employee stock purchase plan ("ESPP") shares | 3 |
| | 3 |
| | 3 |
|
Issuance of convertible debt | — |
| | 18 |
| | — |
|
Investments by noncontrolling interests | 1 |
| | — |
| | 1 |
|
Distributions to noncontrolling interests | (14 | ) | | (3 | ) | | (4 | ) |
Other noncontrolling interests activity | — |
| | 2 |
| | (1 | ) |
Comprehensive income | 132 |
| | 322 |
| | 567 |
|
Balance at December 31, | $ | 1,857 |
| | $ | 1,718 |
| | $ | 1,197 |
|
See accompanying notes to consolidated financial statements.
KBR, Inc.
Consolidated Statements of Cash Flows
(In millions)
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 2021 | | 2020 | | 2019 |
| | | | | |
Cash flows from operating activities: | | | | | |
Net income (loss) | $ | 26 | | | $ | (51) | | | $ | 209 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 146 | | | 115 | | | 104 | |
Equity in (earnings) losses of unconsolidated affiliates | 170 | | | (30) | | | (35) | |
Deferred income tax (benefit) expense | 44 | | | (40) | | | (14) | |
Gain on disposition of assets | (2) | | | (18) | | | (17) | |
| | | | | |
Goodwill impairment | — | | | 99 | | | — | |
Asset impairments | 2 | | | 98 | | | — | |
| | | | | |
Other | 56 | | | 43 | | | 34 | |
Changes in operating assets and liabilities, net of acquired businesses: | | | | | |
Accounts receivable, net of allowance for credit losses | (476) | | | 127 | | | (16) | |
Contract assets | (48) | | | 39 | | | (31) | |
Claims receivable | — | | | 29 | | | 39 | |
Accounts payable | 447 | | | (40) | | | 23 | |
Contract liabilities | (17) | | | (134) | | | 19 | |
Accrued salaries, wages and benefits | 38 | | | 38 | | | (9) | |
Payments on operating lease liabilities | (59) | | | (61) | | | (56) | |
| | | | | |
Payments from unconsolidated affiliates, net | 17 | | | 15 | | | 10 | |
Distributions of earnings from unconsolidated affiliates | 47 | | | 38 | | | 69 | |
| | | | | |
Pension funding | (46) | | | (46) | | | (45) | |
| | | | | |
| | | | | |
| | | | | |
Restructuring reserve | (26) | | | 89 | | | — | |
Other assets and liabilities | (41) | | | 57 | | | (28) | |
Total cash flows provided by operating activities | 278 | | | 367 | | | 256 | |
Cash flows from investing activities: | | | | | |
Purchases of property, plant and equipment | (30) | | | (20) | | | (20) | |
Proceeds from sale of assets or investments | 44 | | | 1 | | | 9 | |
Investments in equity method joint ventures | (29) | | | (26) | | | (146) | |
Acquisitions of businesses, net of cash acquired | (399) | | | (832) | | | — | |
Acquisition of technology license | (7) | | | — | | | — | |
Other | (7) | | | — | | | (1) | |
Total cash flows used in investing activities | $ | (428) | | | $ | (877) | | | $ | (158) | |
KBR, Inc. Consolidated Statements of Cash Flows (In millions) |
| | | | | | | | | | | |
| Years ended December 31, |
| 2019 | | 2018 | | 2017 |
| | | | | |
Cash flows from operating activities: | | | | | |
Net income | $ | 209 |
| | $ | 310 |
| | $ | 440 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 104 |
| | 63 |
| | 48 |
|
Equity in earnings of unconsolidated affiliates | (35 | ) | | (79 | ) | | (70 | ) |
Deferred income tax (benefit) expense | (14 | ) | | 26 |
| | (322 | ) |
Loss (gain) on disposition of assets | (17 | ) | | 2 |
| | (5 | ) |
Gain on consolidation of Aspire subcontracting entities | — |
| | (108 | ) | | — |
|
Other | 34 |
| | 24 |
| | 29 |
|
Changes in operating assets and liabilities, net of acquired businesses: | | | | | |
Accounts receivable, net of allowance for doubtful accounts | (16 | ) | | (203 | ) | | 92 |
|
Contract assets | (31 | ) | | 25 |
| | 40 |
|
Claims receivable | 39 |
| | 3 |
| | 430 |
|
Accounts payable | 23 |
| | 112 |
| | (193 | ) |
Contract liabilities | 19 |
| | (60 | ) | | (198 | ) |
Accrued salaries, wages and benefits | (9 | ) | | 11 |
| | 14 |
|
Payments from (advances to) unconsolidated affiliates, net | 10 |
| | 12 |
| | 11 |
|
Distributions of earnings from unconsolidated affiliates | 69 |
| | 75 |
| | 62 |
|
Pension funding | (45 | ) | | (41 | ) | | (37 | ) |
Other assets and liabilities | (84 | ) | | (7 | ) | | (148 | ) |
Total cash flows provided by operating activities | 256 |
| | 165 |
| | 193 |
|
Cash flows from investing activities: | | | | | |
Purchases of property, plant and equipment | (20 | ) | | (17 | ) | | (8 | ) |
Investments in equity method joint ventures | (146 | ) | | (344 | ) | | — |
|
Proceeds from sale of assets or investments | 9 |
| | 25 |
| | 2 |
|
Acquisitions of businesses, net of cash acquired | — |
| | (354 | ) | | (4 | ) |
Adjustments to cash due to consolidation of Aspire entities | — |
| | 197 |
| | — |
|
Other | (1 | ) | | 2 |
| | (2 | ) |
Total cash flows used in investing activities | $ | (158 | ) | | $ | (491 | ) | | $ | (12 | ) |
KBR, Inc. Consolidated Statements of Cash Flows (In millions) | |
| | Years ended December 31, | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | 2017 | | Years ended December 31, |
| | | | | | | 2021 | | 2020 | | 2019 |
Cash flows from financing activities: | | | | | | Cash flows from financing activities: | |
Borrowings on long term debt | | Borrowings on long term debt | 164 | | | 359 | | | — | |
Borrowings on revolving credit agreement | | Borrowings on revolving credit agreement | 126 | | | 260 | | | — | |
Payments on short-term and long-term borrowings | | Payments on short-term and long-term borrowings | (44) | | | (281) | | | (70) | |
| Debt issuance costs | | Debt issuance costs | (3) | | | (5) | | | — | |
| Payments of dividends to shareholders | | Payments of dividends to shareholders | (61) | | | (54) | | | (46) | |
Net proceeds from issuance of common stock | | Net proceeds from issuance of common stock | 12 | | | 4 | | | 5 | |
Payments to reacquire common stock | (4 | ) | | (3 | ) | | (53 | ) | Payments to reacquire common stock | (82) | | | (51) | | | (4) | |
Acquisition of remaining ownership interest in joint ventures | — |
| | (56 | ) | | — |
| |
Investments from noncontrolling interests | 1 |
| | — |
| | 1 |
| |
| Distributions to noncontrolling interests | (14 | ) | | (3 | ) | | (4 | ) | Distributions to noncontrolling interests | (23) | | | (4) | | | (14) | |
Payments of dividends to shareholders | (46 | ) | | (44 | ) | | (45 | ) | |
Proceeds from sale of warrants | — |
| | 22 |
| | — |
| |
Purchase of note hedges | — |
| | (62 | ) | | — |
| |
Issuance of convertible notes | — |
| | 350 |
| | — |
| |
Net proceeds from issuance of common stock | 5 |
| | 2 |
| | — |
| |
Excess tax benefits from share-based compensation | — |
| | 1 |
| | — |
| |
Borrowings on revolving credit agreement | — |
| | 250 |
| | — |
| |
Borrowings on long term debt | — |
| | 1,075 |
| | — |
| |
Payments on revolving credit agreement | — |
| | (720 | ) | | (180 | ) | |
Payments on short-term and long-term borrowings | (70 | ) | | (100 | ) | | (9 | ) | |
Debt issuance costs | — |
| | (57 | ) | | — |
| |
Other | (5 | ) | | (1 | ) | | — |
| Other | (2) | | | (3) | | | (4) | |
Total cash flows provided (used) by financing activities | (133 | ) | | 654 |
| | (290 | ) | |
Total cash flows provided by (used in) financing activities | | Total cash flows provided by (used in) financing activities | 87 | | | 225 | | | (133) | |
Effect of exchange rate changes on cash | 8 |
| | (28 | ) | | 12 |
| Effect of exchange rate changes on cash | (3) | | | 9 | | | 8 | |
Increase (decrease) in cash and equivalents | (27 | ) | | 300 |
| | (97 | ) | |
Decrease in cash and equivalents | | Decrease in cash and equivalents | (66) | | | (276) | | | (27) | |
Cash and equivalents at beginning of period | 739 |
| | 439 |
| | 536 |
| Cash and equivalents at beginning of period | 436 | | | 712 | | | 739 | |
Cash and equivalents at end of period | $ | 712 |
| | $ | 739 |
| | $ | 439 |
| Cash and equivalents at end of period | $ | 370 | | | $ | 436 | | | $ | 712 | |
Supplemental disclosure of cash flows information: | | | | | | Supplemental disclosure of cash flows information: | | | | | |
Cash paid for interest | $ | 80 |
| | $ | 52 |
| | $ | 21 |
| Cash paid for interest | $ | 63 | | | $ | 53 | | | $ | 80 | |
Cash paid for income taxes (net of refunds) | $ | 54 |
| | $ | 21 |
| | $ | 144 |
| Cash paid for income taxes (net of refunds) | $ | 49 | | | $ | 49 | | | $ | 54 | |
Noncash investing activities | | | | | | |
Acquisition of technology licensing rights | $ | — |
| | $ | 16 |
| | $ | — |
| |
| Noncash financing activities | | | | | | Noncash financing activities | |
Dividends declared | $ | 11 |
| | $ | 11 |
| | $ | 11 |
| Dividends declared | $ | 15 | | | $ | 14 | | | $ | 11 | |
See accompanying notes to consolidated financial statements.
KBR, Inc.
Notes to Consolidated Financial Statements
Note 1. Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of KBR, Inc. and the subsidiaries it controls, including VIEs where it is 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 1210 to our consolidated financial statements for further discussion of our equity investments and VIEs. All material intercompany balances and transactions are eliminated in consolidation.
Reclassifications
Certain amounts in prior year amountsperiods have been reclassified to conform to thewith current year presentation in our consolidated statements of operations, consolidated balance sheets and the 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.period presentation.
We have elected to classify certain indirect costs incurred as overhead (included in "Cost of revenues") or general administrative expenses for U.S. GAAP reporting purposes in the same manner as such costs are defined in our disclosure statements under CAS. Effective January 1, 2019, we established a new CAS structure and revised our disclosure statements accordingly to reflect the related cost accounting practice changes. Consequently, for the years ended December 31, 2018 and 2017, $128 million and $97 million, respectively, was reclassified from "Cost of revenues" to "Selling, general and administrative expenses" on our consolidated statement of operations.
|
| | | | | | | | | | | | | | | |
| Year Ended | | Year Ended |
| December 31, 2018 | | December 31, 2017 |
Dollars in millions | As Reported | | As Previously Reported | | As Reported | | As Previously Reported |
Statement of Operations | | | | | | | |
Cost of revenues | $ | (4,329 | ) | | $ | (4,457 | ) | | $ | (3,732 | ) | | $ | (3,829 | ) |
Selling, general and administrative expenses | (294 | ) | | (166 | ) | | (244 | ) | | (147 | ) |
BusinessSegment Reorganization
Effective January 1, 2019,2021, we changedimplemented a strategic change to the namestructure of our internal organization and transitioned from a 3-core business segment model to a 2-core business segment model comprised of Government ServicesSolutions and Sustainable Technology Solutions. The new Sustainable Technology Solutions segment is anchored by our innovative, proprietary process technologies. It also includes our highly synergistic advisory practice focused on energy transition and net-zero carbon emission consulting as well as the technology-led industrial solutions focused on innovative digital operations and maintenance ("O&M") solutions and advanced remote operations capabilities to "Government Solutions", ourimprove throughput, reliability and environmental sustainability. Infusing high-end, sustainability expertise, client relationships and innovative, technology-led O&M solutions into Sustainable Technology segmentSolutions is expected to "Technology Solutions"increase resilience, generate new opportunities, simplify the business model and our Hydrocarbons Services segmentbetter position us to "Energy Solutions". The change did not have an impact ondeliver its offerings across a broader industrial base.
Effective January 1, 2021, we reorganized our reportable segments.segments, which are equivalent to our operating segments, and businesses as follows:
As of January 1, 2019, our segments consist of•Government Solutions includes the following 54 business units: Defense & Intel, formerly the Defense Systems Engineering and Centauri businesses; Science & Space, formerly called Space & Mission Solutions; Readiness & Sustainment, formerly called Logistics; and International.
•Sustainable Technology Solutions includes components of Energy Solutions, Technology Solutions and Non-strategic Business, with the exception of our Australian infrastructure business which moved to GS International in our Government Solutions segment.
•Other includes corporate and other.
Upon this segment change in 2021, all prior period information was recast to reflect this change in reportable segments:
Government Solutions
Technology Solutions
Energy Solutions
Non-strategic Business
Other
segments. See Note 2 to our consolidated financial statements for further discussion on our segments. We have presented
Business Reorganization and Restructuring Activities
During fiscal year 2020, our management initiated and approved restructuring plans in response to the dislocation of the global energy market resulting from the decline in oil prices and the COVID-19 pandemic. The restructuring plan included the reorganization of KBR's management structure primarily within our legacy Energy Solutions business segment results reflectingduring the first and second quarters of 2020 and entailed approving strategic business restructuring activities and deciding to discontinue pursuing certain projects, principally lump-sum EPC and commoditized construction services. The restructuring plan is designed to refine our market focus, optimize costs and improve operational efficiencies. As a result of these changes for all periods presented. In conjunction with the changerestructuring activities and adverse market conditions, we performed interim impairment tests in segments, we evaluated goodwill associated with each2020 of our reporting units using Level 3 fair value inputs,goodwill, intangible assets, significant investments and novarious other assets. See Note 7 "Restructuring Charges and Asset Impairments" and Note 9 "Goodwill and Goodwill Impairment" for further discussion of restructuring and impairment indicators were identified.charges recognized during the year ended December 31, 2020. These reorganization activities in 2020 did not have an impact on our identified reportable segments.
See Note 2 to our consolidated financial statements for further discussion of our segments.
Use of Estimates
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of certain assets and liabilities;liabilities, the reported amounts of revenues and expenses for
the periods covered and certain amounts disclosed in the notes to our consolidated financial statements. These estimates are based on information available through the date of the issuance of the financial statements and actual results could differ from those estimates. Areas requiring significant estimates and assumptions by our management include the following:
•project revenues, costs and profits on engineering and constructionour contracts, including recognition of estimated losses on uncompleted contracts
•award fees, costs and profits on government services contracts
provisions for uncollectible receivables and •client claims and recoveries of costs from subcontractors, vendors and others
•provisions for income taxes and related valuation allowances and tax uncertainties
•recoverability of goodwill
•recoverability of other intangibles and long-lived assets and related estimated lives
•recoverability of equity method investments
•valuation of pension obligations and pension assets
•accruals for estimated liabilities, including litigation accruals
•consolidation of VIEs
•valuation of share-based compensation
•valuation of assets and liabilities acquired in business combinations
In accordance with normal practice in the construction industry, we include in current assets and current liabilities amounts related to construction contracts realizable and payable over a period in excess of one year.
Cash and Equivalents
We consider highly liquid investments with an original maturity of three months or less to be cash equivalents. See Note 5 to our consolidated financial statements for our discussion on cash and equivalents.
Revenue Recognition
We adoptedrecognize revenue in accordance with ASC Topic 606, Revenue from Contracts with CustomersCustomers. on January, 1, 2018. Our financial results for reporting periods beginning January 1, 2018 are presented under the new accounting standard, while financial results for prior periods will continue to be reported in accordance with our historical accounting policy.
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.
Contract Combination
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 primarily 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 a limited number of contracts with multiple performance obligations, we allocate the transaction price to each performance obligation using our best estimate of the relative 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, which is more prevalent than not, 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.
Services ContractsContract Types
For serviceThe Company performs work under contracts (including maintenance contracts) wherethat broadly consists of fixed-price, cost-reimbursable, time-and-materials, or a combination of the three.
Fixed-price contracts include both lump-sum and unit-rate contracts. Under lump-sum contracts, we haveperform a defined scope of work for a specified fee to cover all costs and any profit element. Lump-sum contracts entail significant risk to us because they require us to predetermine the rightwork to consideration frombe performed, the customer in an amount that corresponds directlyproject execution schedule and all the costs associated with the value receivedscope of work. Unit-rate contracts are essentially fixed-price contracts with the only variable being units of work to be performed. Although fixed-price contracts involve greater risk than cost-reimbursable contracts, they also are potentially more profitable because the owner/customer pays a premium to transfer project risks to us.
Time-and-materials contracts typically provide for negotiated fixed hourly rates for specified categories of direct labor. The rates cover the cost of direct labor, indirect expense and fee. These contracts can also allow for reimbursement of cost of material plus a fee, if applicable. In U.S. government contracting, this type of contract is generally used when there is uncertainty of the extent or duration of the work to be performed by the customercontractor at the time of contract award or it is not possible to anticipate costs with any reasonable degree of confidence. With respect to time-and-materials contracts, we assume the price risk because our costs of performance may exceed negotiated hourly rates. In commercial and non-U.S. government contracting, this contract type is generally used for defined and non-defined scope contracts where there is a higher degree of uncertainty and risks as to the scope of work. These types of contracts may also provide for a guaranteed maximum price where the total cost plus the fee cannot exceed an agreed upon guaranteed maximum price or not-to-exceed provisions.
Under cost-reimbursable contracts, the price is generally variable based upon our actual allowable costs incurred for materials, equipment, reimbursable labor hours, overhead and G&A expenses. Profit on cost-reimbursable contracts may be in the form of a fixed fee or a mark-up applied to costs incurred, or a combination of the two. The fee may also be an incentive fee based on performance indicators, milestones or targets and can be based on customer discretion or in form of an award fee determined based on customer evaluation of the Company's performance against contractual criteria. Cost-reimbursable contracts may also provide for a guaranteed maximum price where the total fee plus the total cost cannot exceed an agreed upon guaranteed maximum price. Cost-reimbursable contracts are generally less risky because the owner/customer retains many of the project risks, however it generally requires us to use our performancebest efforts to date, revenue is recognized
when servicesaccomplish the scope of the work within a specified time and budget. Cost-reimbursable contracts with the U.S. government are performedgenerally subject to the FAR and contractually billable. For all otherare competitively priced based on estimated or actual costs of providing the contractual goods or services. The FAR provides guidance on types of service contracts, revenue is recognized over time generally using the cost-to-cost method (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress because it best depicts the transfer of valuethat are allowable in establishing prices for goods and services provided to the U.S. government and its agencies. Pricing for non-U.S. government agencies and commercial customers is based on specific negotiations with each customer.
See Note 3 to our consolidated financial statements for further discussion of our revenue by contract type.
Contract Costs
Contract costs include all direct materials, labor and subcontractor costs and an allocation of indirect costs related to contract performance.
Under the typical payment terms of our services contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., weekly, biweekly or monthly) or upon achievement of contractual milestones.
Engineering and Construction Contracts
We recognize revenue over time, as performance obligations are satisfied, for substantially all of our engineering and construction contracts due to the continuous transfer of control to the customer. For most of our engineering and construction contracts, 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. We recognize revenue using the cost-to-cost method, based primarily on contract costs incurred to date compared to total estimated contract costs. This method is the most accurate measure of our contract performance because it directly measures the value of the goods and services transferred to the customer.
Contract costs include all direct material, labor and subcontractor costs and indirect costs related to contract performance. Customer-furnished materials are included in both contract revenue and cost of revenue when management concludes that the company is acting as a principal rather than as an agent. We recognize revenue, but not profit, on certain uninstalled materials that are not specifically produced or fabricated for a project.project, which revenue is recognized up to cost. Revenue for uninstalled materials is recognized when the cost is incurred and control is transferred to the customer.customer, which revenue is recognized using the cost-to-cost method. Project mobilization costs are generally charged to the project as incurred when they are an integrated part of the performance obligation being transferred to the client. Pre-contract costs are expensed as incurred unless they are expected to be recovered from the client.
The paymentContract costs incurred for U.S. government contracts, including indirect costs, are subject to audit and adjustment by the DCAA. If the U.S. government concludes costs charged to a contract are not reimbursable under the terms of the contract or applicable procurement regulations, these costs are disallowed or, if already reimbursed, we may be required to refund the reimbursed amounts to the customer. Such conditions may also include interest and other financial penalties.
We provide limited warranties to customers for work performed under our engineeringcontracts that typically extend for a limited duration following substantial completion of our work on a project. Such warranties are not sold separately and construction contracts from timedo not provide customers with a service in addition to time require the customer to make advance payments as well as interim payments as work progresses. The advance payment generally isassurance of compliance with agreed-upon specifications. Accordingly, these types of warranties are not considered to contain a significant financing component as we expect to recognize those amounts in revenue within a year of receipt as work progresses on the relatedbe separate performance obligation.obligations. Historically, warranty claims have not been material.
Variable Consideration
It is common for our contracts to contain variable consideration in the form of award fees, incentive fees, performance bonuses, award fees, liquidated damages or penalties.penalties that may increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or targets and can be based on customer discretion. Other contract provisions also give rise to variable consideration such as unapproved change orders and claims, and
on certain contracts, index-based price adjustments. We estimate the amount of variable consideration at the most likely amount to which we expect to be entitled. Variable consideration is included in the transaction price when it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include such amounts in the transaction price are based largely on our assessment of legal enforceability, anticipated performance and any other information (historical, current or forecasted) that is reasonably available to us.
Variable consideration associated with claims and unapproved change orders is included in the transaction price only to the extent of costs incurred. We recognize claims against vendors, subcontractors and others as a reduction in recognized costs when enforceability is established by the contract and the amounts are reasonably estimable and probable of recovery. Reductions in costs are recognized to the extent of the lesser of the amounts management expects to recover or actual costs incurred.
We provide limited warranties to customers for work performed under our contracts that typically extend for a limited duration following substantial completion of our work on a project. Such warranties are not sold separately and do not provide customers with a service in addition to assurance of compliance with agreed-upon specifications. Accordingly, these types of warranties are not considered to be separate performance obligations. Historically, warranty claims have not resulted in material costs incurred.
Contract Estimates and 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 and subject to many variables and requires significant judgment. As a significant change in one or more of these estimatesestimated total revenue and cost could affect the profitability of our contracts, we routinely review and update our contract-related estimates through a disciplined project review process in which management reviews the progress and execution of our performance obligations and the EAC. As part of this process, management reviews information including, but not limited to, outstanding contract matters, progress towards completion, program schedule and the associated changes in estimates of revenues and costs. Management must make assumptions and estimates regarding the availability and productivity of labor, the complexity of the work to be performed, the availability and cost of materials, the performance of subcontractors and the availability and timing of funding from the customer, along with other risks inherent in performing services under all contracts where we recognize revenue over time using the cost-to-cost method.
We recognize changes in contract estimates on a cumulative catch-up basis in the period in which the changes are identified. Such changes in contract estimates can result in the recognition of revenue in a current period for performance obligations which were satisfied or partially satisfied in prior period. Changes in contract estimates may also result in the reversal of previously recognized revenue if the current estimate differs from the previous 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. See Note 6 for changes in all other project-related estimates.
Contracts are often modified to account for changes in contract specifications and requirements. 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 prospectively 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.
Contract Assets and Liabilities
Billing practices are governed by the contract terms of each project based upon costs incurred, achievement of milestones or predetermined schedules. Billings do not necessarily correlate with revenue recognized over time using the percentage-of-completion method. Contract assets include unbilled amounts typically resulting from revenue under long-term contracts when the percentage-of-completion method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Contract liabilities consist of advance payments and billings in excess of revenue recognized as well as deferred revenue.
Retainage, included in contract assets, represent the amounts withheld from billings by our clients pursuant to provisions in the contracts and may not be paid to us until the completion of specific tasks or the completion of the project and, in some instances, for even longer periods. Retainage may also be subject to restrictive conditions such as performance guarantees.
Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. We classify contract assets and liabilities
The payment terms of our contracts from time to time require the customer to make advance payments as current or noncurrentwell as interim payments as work progresses. The advance payment generally is not considered to contain a significant financing component as we expect to recognize those amounts in revenue within a year of receipt as work progresses on the extent the revenue is expected to be recognized in excess of one year from the balance sheet date.related performance obligation.
Gross Profit
Gross profit represents revenues less the cost of revenues, which includes business segment overhead costs directly attributable to execution of contracts by the business segment.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses represent expenses that are not associated with the execution of the contracts. GeneralSelling, general and administrative expenses include charges for such items as executive management, corporate business development, information technology, finance and accounting, human resources and various other corporate functions. The Company classifies indirect costs incurred within or allocated to its U.S. government customers as overhead (included in cost of revenues) or selling, general and administrative expenses in the same manner as such costs are defined in the Company’s disclosure statements under CAS.
Accounts Receivable
Accounts receivable are recorded based on contracted prices when we obtain an unconditionalinclude amounts billed and currently due from customers, amounts billable where the right to payment underconsideration is unconditional and amounts unbilled. Amounts billable and unbilled amounts are recognized at estimated realizable value and consist of costs and fees, substantially all of which are expected to be billed and collected generally within one year. Unbilled amounts also include rate variances that are billable upon negotiation of final indirect rates with the terms of our contracts. DCAA.
We establish an allowance for doubtful accountscredit losses 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. See Note 22 to our consolidated financial statements for our discussion on sales of receivables.
In 2018, we entered into a factoring agreement to sell certain receivables to unrelated third-party financial institutions. These transactions are accounted for as sales and result in a reduction in accounts receivable because the agreements transfer effective control over and risk related to the receivable to the purchaser. Our factoring agreement does not allow for recourse in the event of uncollectibility, and we do not retain any controlling interest in the underlying accounts receivable once sold. We derecognized $14 million of accounts receivable as of December 31, 2018 under this factoring agreement. The fees associated with sale of receivables under this agreement were not material in 2018. No receivables were factored in 2019.
Property, Plant and Equipment
Property, plant and equipment are reported at cost less accumulated depreciation except for those assets that have been written down to their fair values due to impairment. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance and repairs are charged to expense as incurred. The cost of property, plant and equipment sold or otherwise disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in operating income for the respective period. Depreciation is generally provided on the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized using the straight-line method over the shorter of the useful life of the improvement or the lease term. See Note 108 to our consolidated financial statements for our discussion on property, plant and equipment.
Acquisitions
We account for business combinations using the acquisition method of accounting in accordance with ASC 805 - Business Combinations, which allocates the fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. We conduct external and internal valuationsengage third-party appraisal firms when appropriate to assist in the fair value determination of certain acquired assets and liabilities for inclusion in our balance sheet as of the date of acquisition.intangible assets. Initial purchase price allocations are subject to revisions within the measurement period, not to exceed one year from the date of acquisition. Acquisition-related expenses and transaction costs associated with business combinations are expensed as incurred.
Goodwill and Intangible Assets
Goodwill is an asset representing the excess cost over the fair market value of net assets acquired in business combinations. In accordance with ASC 350 - Intangibles - Goodwill and Other, goodwill is not amortized but is tested annually for impairment or on an interim basis when indicators of potential impairment exist. Goodwill is tested for impairment at the reporting unit level. Our reporting units are our operating segments or components of operating segments where discrete
financial information is available and segment management regularly reviews the operating results. For purposes of impairment testing, goodwill is allocated to the applicable reporting units based on our reporting structure. If
We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit exceedsis less than its carrying value,value. Qualitative factors assessed for each of the goodwillapplicable reporting units include, but are not limited to, changes in macroeconomic conditions, industry and market considerations, cost factors, discount rates, competitive environments and financial performance of the reporting unitunits. If the qualitative assessment indicates that it is more likely than not considered impaired. Ifthat the carrying value of a reporting unit exceeds its estimated fair value, a second step ofquantitative test is required.
We also have the goodwilloption to proceed directly to the quantitative test. Under the quantitative impairment test, is performed to measure the amount of goodwill impairment. The second step compares the impliedestimated fair value of theeach reporting unit goodwillis compared to its carrying value, including goodwill. If the carrying value of the reporting unit goodwill.including goodwill exceeds its fair value, an impairment charge equal to the excess would be recognized, up to a maximum amount of goodwill allocated to that reporting unit. We determinecan resume the impliedqualitative assessment in any subsequent period for any reporting unit.
For 2021, management performed a qualitative impairment assessment of our reporting units, of which there were no indications that it was more likely than not that the fair value of theour reporting units were less than their respective carrying values. As such, a quantitative goodwill in the same manner as determining the amount oftest was not required, and no goodwill to beimpairment was recognized in a business combination. We completed our annual2021. For 2020, as impairment indicators were identified during the interim periods, we utilized the two-step process to perform an impairment test resulting in goodwill impairment test in the fourth quarter of 2019 and determined that none of the goodwill was impaired.$99 million. See Note 119 to our consolidated financial statements for reported goodwill in each of our segments.segments and goodwill impairment recognized.
We had intangible assets with net carrying values of $495$708 million and $516$683 million as of December 31, 20192021 and 2018,2020, respectively. Intangible assets with indefinite lives are not amortized but are subject to annual impairment tests or on an interim basis when indicators of potential impairment exist. An intangible asset with an indefinite life is impaired if its carrying value exceeds its fair value. As ofDuring the year ended December 31, 2019, NaN2021, there were no triggering events identified. During the year ended December 31, 2020, certain of our trade name intangible assets with an indefinite liveslife were impaired. Intangible assets with finite lives are amortized on a straight-line basis over the useful life of those assets, ranging from 1 year to 25 years. See Note 119 to our consolidated financial statements for further discussion of our intangible assets.
Investments
We account for non-marketable investments using the equity method of accounting if the investment gives us the ability to exercise significant influence over, but not control, of an investee. Significant influence generally exists if we have an ownership interest representing between 20% and 50% of the voting stock of the investee. Under the equity method of accounting, investments are stated at initial cost and are adjusted for subsequent additional investments and our proportionate share of earnings or losses and distributions.
Equity in earnings (losses) of unconsolidated affiliates, in the consolidated statements of operations, reflects our proportionate share of the investee's net income, including any associated affiliate taxes. Our proportionate share of the investee’s other comprehensive income (loss), net of income taxes, is recorded in the consolidated statements of shareholders’ equity and consolidated statements of comprehensive income (loss). In general, the equity investment in our unconsolidated affiliates is equal to our current equity investment plus those entities' undistributed earnings.
We evaluate our equity method investments for impairment at least annually or whenever events or changes in circumstances indicate, in management’s judgment, that the carrying value of an investment may have experienced an other-than-temporary decline in value. When evidence of loss in value has occurred, management compares the estimated fair value of the investment to the carrying value of the investment to determine whether an impairment has occurred. If the estimated fair value is less than the carrying value and management considers the decline in value to be other than temporary, the excess of the carrying value over the estimated fair value is recognized in the financial statements as an impairment. See Note 1210 to our consolidated financial statements for our discussion on equity method investments.
WhereIn cases where we are unable to exercise significant influence over the investee, or when our investment balance is reduced to zero from our proportionate share of losses, the investments are accounted for under the cost method. Under the cost method, investments are carried at cost and adjusted only for other-than-temporary declines in fair value, distributions of earnings or additional investments. In cases where we have a constructive or legal obligation to fund deficits of the joint venture, we record such deficits as other current liabilities on our consolidated balance sheets.
Joint Ventures and VIEs
The majority of our joint ventures are VIEs. We account for VIEs in accordance with ASC 810 - Consolidation, which requires the consolidation of VIEs in which a company has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive the benefits from the VIE that could potentially be significant to the VIE. If a reporting enterprise meets these conditions, then it has a controlling financial interest and is the primary beneficiary of the VIE. Our unconsolidated VIEs are accounted for under the equity method of accounting.
We assess all newly created entities and those with which we become involved to determine whether such entities are VIEs and, if so, whether or not we are their primary beneficiary. Most of the entities we assess are incorporated or unincorporated joint ventures formed by us and our partner(s) for the purpose of executing a project or program for a customer and are generally dissolved upon completion of the project or program. Many of our long-term, engineering and constructioncommercial projects are executed through such joint ventures. Although the joint ventures in which we participate own and hold contracts with the customers, the services required by the contracts are typically performed by the joint venture partners, or by other subcontractors under subcontracts with the joint ventures. Typically, these joint ventures are funded by advances from the project owner, and accordingly, require little or no equity investment by the joint venture partners but may require subordinated financial support from the joint venture partners such as letters of credit, performance and financial guarantees or obligations to fund losses incurred by the joint venture. Other joint ventures, such as PFIs, generally require the partners to invest equity and take an ownership position in an entity that manages and operates an asset after construction is complete. The assets of joint ventures are restricted for use to the obligations of the particular joint venture and are not available for our general operations.
We perform a qualitative assessment to determine whether we are the primary beneficiary once an entity is identified as a VIE. Thereafter, we continue to re-evaluate whether we are the primary beneficiary of the VIE in accordance with ASC 810 - Consolidation. A qualitative assessment begins with an understanding of the nature of the risks in the entity as well as the nature of the entity’s activities. These include the terms of the contracts entered into by the entity, ownership interests issued by the entity and how they were marketed and the parties involved in the design of the entity. We then identify all of the variable interests held by parties involved with the VIE including, among other things, equity investments, subordinated debt financing, letters of credit, financial and performance guarantees and contracted service providers. Once we identify the variable interests, we determine those activities which are most significant to the economic performance of the entity and which variable interest holder has the power to direct those activities. Though infrequent, some of our assessments reveal no primary beneficiary because the power to direct the most significant activities that impact the economic performance is held equally by two or more variable interest holders
who are required to provide their consent prior to the execution of their decisions. Most of the VIEs with which we are involved have relatively few variable interests and are primarily related to our equity investment, significant service contracts and other subordinated financial support. See Note 1210 to our consolidated financial statements for our discussion on variable interest entities.
Occasionally, we may determine that we are the primary beneficiary as a result of a reconsideration event associated with an existing unconsolidated VIE. We account for the change in control under the acquisition method of accounting for business combinations in accordance with ASC 805. See Note 4 to our consolidated financial statements.
Deconsolidation of a Subsidiary
We account for a gain or loss on deconsolidation of a subsidiary or derecognition of a group of assets in accordance with ASC 810-10-40-5. We measure the gain or loss as the difference between (a) the aggregate of fair value of any consideration received, the fair value of any retained noncontrolling investment and the carrying amount of any noncontrolling interest in the former subsidiary at the date the subsidiary is deconsolidated and (b) the carrying amount of the former subsidiary’s assets and liabilities or the carrying amount of the group of assets.
Pensions
We account for our defined benefit pension plans in accordance with ASC 715 - Compensation - Retirement Benefits, which requires an employer to:
•recognize on its balance sheet the funded status (measured as the difference between the fair value of plan assets and the benefit obligation) of the pension plan;
•recognize, through comprehensive income, certain changes in the funded status of a defined benefit plan in the year in which the changes occur;
•measure plan assets and benefit obligations as of the end of the employer’s fiscal year; and
•disclose additional information.
Our pension benefit obligations and expenses are calculated using actuarial models and methods. Two of theThe more critical assumptionsassumption and estimatesestimate used in the actuarial calculations areis the discount rate for determining the current value of benefit obligations and the expected rate of return on plan assets.obligations. Other assumptions and estimates used in determining benefit obligations and plan expenses include expected rate of return on plan assets, inflation rates and demographic factors such as retirement age, mortality and turnover. These assumptions and estimates are evaluated periodically (typically annually) and are updated accordingly to reflect our actual experience and expectations.
The discount rate used to determine the benefit obligations was computed using a yield curve approach that matches plan specific cash flows to a spot rate yield curve based on high quality corporate bonds. The expected long-term rate of return on assets was determined by a stochastic projection that takes into account asset allocation strategies, historical long-term performance of individual asset classes, an analysis of additional return (net of fees) generated by active management, risks using standard deviations and correlations of returns among the asset classes that comprise the plans' asset mix. Plan assets are comprised primarily of equity securities, fixed income funds and securities, hedge funds, real estate and other funds. As we have both domestic and international plans, these assumptions differ based on varying factors specific to each particular country, participant demographics or economic environment.
Unrecognized actuarial gains and losses are generally recognized using the corridor method over a period of approximately 2522 years, which represents a reasonable systematic method for amortizing gains and losses for the employee group. Our unrecognized actuarial gains and losses arise from several factors, including experience and assumption changes in the obligations and the difference between expected returns and actual returns on plan assets. The difference between actual and expected returns is deferred as an unrecognized actuarial gain or loss on our consolidated statement of comprehensive income (loss) and is recognized as a decrease or an increase in future pension expense.
Income Taxes
We recognize the amount of taxes payable or refundable for the year and deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. We provide a valuation allowance for deferred tax assets if it is more likely than not that these items will not be realized. See Note 1513 to our consolidated financial statements for our discussion on income taxes.
Income taxes are accounted for under the asset and liability method. We provide a valuation allowance for deferred tax assets if it is more likely than not that these items will not be realized. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. A current tax asset or liability is recognized for the estimated taxes refundable or payable on tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will not be realized. We consider the scheduled reversal of deferred tax liabilities, income available from carryback years, projected future taxable income and available tax planning strategies in making this assessment. Additionally, we use forecasts of certain tax elements such as taxable income and foreign tax credit utilization in making this assessment of realization. Given the inherent uncertainty involved with the use of such estimates and assumptions, there can be significant variation between estimated and actual results.
We have operations in numerous countries other than the United States. Consequently, we are subject to the jurisdiction of a significant number of taxing authorities. The income earned in these various jurisdictions is taxed on differing bases, including income actually earned, income deemed earned and revenue-based tax withholding. The final determination of our tax liabilities involves the interpretation of local tax laws, tax treaties and related authorities in each jurisdiction. Changes in the operating environment, including changes in tax law and currency/repatriation controls, could impact the determination of our tax liabilities for a tax year.
We recognize the effect of income tax positions only if it is more likely than not that those positions will be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records potential interest and penalties related to unrecognized tax benefits in income tax expense.
Tax filings of our subsidiaries, unconsolidated affiliates and related entities are routinely examined by tax authorities in the normal course of business. These examinations may result in assessments of additional taxes, which we work to resolve with the tax authorities and through the judicial process. Predicting the outcome of disputed assessments involves some uncertainty. Factors such as the availability of settlement procedures, willingness of tax authorities to negotiate and the operation and impartiality of judicial systems vary across the different tax jurisdictions and may significantly influence the ultimate outcome. We review the facts for each assessment, and then utilize assumptions and estimates to determine the most likely outcome and provide taxes, interest and penalties as needed based on this outcome.
Derivative Instruments
We enter into derivative financial transactions to hedge existing or forecasted risk to changing foreign currency exchange rates and interest rate risk on variable rate debt. We do not enter into derivative transactions for speculative or trading purposes. We recognize all derivatives at fair value on the balance sheet. Derivatives that are not designated as hedges in accordance with ASC 815 - Derivatives and Hedging, are adjusted to fair value and such changes are reflected in the results of operations. If the derivative is designated as a cash flow hedge, changes in the fair value of derivatives are recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of a designated hedge's change in fair value is recognized in earnings. See Note 2322 to our consolidated financial statements for our discussion on derivative instruments.
Recognized gains or losses on derivatives entered into to manage project related foreign exchange risk are included in gross profit. Foreign currency gains and losses for hedges of non-project related foreign exchange risk are reported within "Otherother non-operating income"income (expense) on our consolidated statements of operations. Realized gains or losses on derivatives used to manage interest rate risk are included in interest expense in our consolidated statements of operations.
Concentration of Credit Risk
Financial instruments which potentially subject our company to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables. Our cash is primarily held with major banks and financial institutions throughout the world. We believe the risk of any potential loss on deposits held in these institutions is minimal.
Contracts with clients usually contain standard provisions allowing the client to curtail or terminate contracts for convenience. Upon such a termination, we are generally entitled to recover costs incurred, settlement expenses and profit on work completed prior to termination and demobilization cost.
We have revenues and receivables from transactions with an external customer that amounts to 10% or more of our revenues (which are generally not collateralized). We generated significant revenues from transactions with the U.S. government and U.K. government within our GS business segment. No other customers represented 10% or more of consolidated revenues in any of the periods presented.
The following tables present summarized data related to our transactions with U.S. and U.K governmental agencies.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues and percentage of consolidated revenues from major customers: |
| Years ended December 31, |
Dollars in millions | 2021 | | 2020 | | 2019 |
U.S. government | $ | 5,122 | | 70 | % | | $ | 3,079 | | 53 | % | | $ | 3,014 | | 53 | % |
U.K. government | $ | 508 | | 7 | % | | $ | 573 | | 10 | % | | $ | 659 | | 12 | % |
|
| | | | | | | | | | | |
Revenues from major customers: | | | | | |
| Years ended December 31, |
Dollars in millions | 2019 | | 2018 | | 2017 |
U.S. government | $ | 3,014 |
| | $ | 2,610 |
| | $ | 1,914 |
|
U.K. government | $ | 659 |
| | $ | 622 |
| | $ | 66 |
|
|
| | | | | | | | |
Percentages of revenues and accounts receivable from major customers: | | | | | |
| Years ended December 31, |
| 2019 | | 2018 | | 2017 |
U.S. government revenues percentage | 53 | % | | 53 | % | | 46 | % |
U.S. government receivables percentage | 52 | % | | 57 | % | | 32 | % |
U.K. government revenues percentage | 12 | % | | 13 | % | | 2 | % |
U.K. government receivables percentage | 5 | % | | 4 | % | | 1 | % |
| | | | | | | | | | | | | | | | | | | |
Accounts receivable and percentage of consolidated accounts receivable from major customers: | | | | | |
| December 31, |
Dollars in millions | 2021 | | 2020 | | |
U.S. government | $ | 1,062 | | 75 | % | | $ | 501 | | 56 | % | | |
U.K. government | $ | 81 | | 6 | % | | $ | 47 | | 5 | % | | |
Noncontrolling interest
Noncontrolling interests represent the equity investments of the minority owners in our joint ventures and other subsidiary entities that we consolidate in our financial statements.
Foreign currency
Our reporting currency is the U.S. dollar. The functional currency of our non-U.S. subsidiaries is typically the currency of the primary environment in which they operate. Where the functional currency for a non-U.S. subsidiary is not the U.S. dollar, translation of all of the assets and liabilities (including long-term assets, such as goodwill) to U.S. dollars is based on exchange rates in effect at the balance sheet date. Translation of revenues and expenses to U.S. dollars is based on the average rate during the period and shareholders’ equity accounts are translated at historical rates. Translation gains or losses, net of income tax effects, are reported in "Accumulatedaccumulated other comprehensive loss"loss on our consolidated balance sheets.
Transaction gains and losses that arise from foreign currency exchange rate fluctuations on transactions denominated in a currency other than the functional currency are recognized in income each reporting period when these transactions are either settled or remeasured. Transaction gains and losses on intra-entity foreign currency transactions and balances including advances and demand notes payable, on which settlement is not planned or anticipated in the foreseeable future, are recorded in "Accumulatedaccumulated other comprehensive loss"loss on our consolidated balance sheets.
Share-based compensation
We account for share-based payments, including grants of employee stock options, restricted stock-based awards and performance cash units, in accordance with ASC 718 - Compensation-Stock Compensation, which requires that all share-based payments (to the extent that they are compensatory) be recognized as an expense in our consolidated statements of operations based on their fair values on the award date and the estimated number of shares of common stock we ultimately expect to vest. We recognize share-based compensation expense on a straight-line basis over the service period of the award, which is no greater than 5 years. See Note 2120 to our consolidated financial statements for our discussion on share-based compensation and incentive plans.
Commitments and Contingencies
We record liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
Additional Balance Sheet Information
Other Current Assets. The components of "Otherother current assets"assets on our consolidated balance sheets as of December 31, 20192021 and 20182020 are presented below:
| | | | | | | | | | | |
| December 31, |
Dollars in millions | 2021 | | 2020 |
| | | |
| | | |
Prepaid expenses | $ | 75 | | | $ | 71 | |
Value-added tax receivable | 21 | | | 22 | |
Advances to subcontractors | 15 | | | 10 | |
Other miscellaneous assets | 36 | | | 18 | |
Total other current assets | $ | 147 | | | $ | 121 | |
|
| | | | | | | |
| December 31, |
Dollars in millions | 2019 | | 2018 |
Prepaid expenses | $ | 65 |
| | $ | 49 |
|
Value-added tax receivable | 37 |
| | 29 |
|
Advances to subcontractors | 20 |
| | 5 |
|
Other miscellaneous assets | 24 |
| | 25 |
|
Total other current assets | $ | 146 |
| | $ | 108 |
|
Other Assets.Current Liabilities. Included in "Other assets"The components of other current liabilities on our consolidated balance sheets as of December 31, 20192021 and 2018 is noncurrent refundable income taxes of $98 million and $98 million, respectively, related to various tax refunds subject to ongoing audits with certain tax jurisdictions.
Other Current Liabilities. The components of "Other current liabilities" on our consolidated balance sheets as of December 31, 2019 and 20182020 are presented below:
| | | | | | | | | | | |
| December 31, |
Dollars in millions | 2021 | | 2020 |
Current maturities of long-term debt | $ | 16 | | | $ | 12 | |
Reserve for estimated losses on uncompleted contracts | 17 | | | 16 | |
Retainage payable | 13 | | | 22 | |
Income taxes payable | 2 | | | 16 | |
Restructuring reserve | 17 | | | 32 | |
| | | |
Value-added tax payable | 34 | | | 29 | |
| | | |
Dividend payable | 16 | | | 14 | |
Other miscellaneous liabilities | 63 | | | 52 | |
Total other current liabilities | $ | 178 | | | $ | 193 | |
|
| | | | | | | |
| December 31, |
Dollars in millions | 2019 | | 2018 |
Current maturities of long-term debt | $ | 27 |
| | $ | 22 |
|
Reserve for estimated losses on uncompleted contracts | 10 |
| | 6 |
|
Retainage payable | 41 |
| | 33 |
|
Income taxes payable | 25 |
| | 30 |
|
Value-added tax payable | 36 |
| | 33 |
|
Dividend payable | 11 |
| | 11 |
|
Other miscellaneous liabilities | 36 |
| | 44 |
|
Total other current liabilities | $ | 186 |
| | $ | 179 |
|
Other Liabilities ."Other liabilities" on our consolidated balance sheet as of December 31, 2018 included deferred rent primarily related to real-estate leases as well as the unamortized portion of a deferred gain related to a 2012 sale-leaseback real-estate transaction totaling $92 million. See "Impact of Adoption of New Accounting Standards" for further discussion.
Impact of Adoption of New Accounting Standards
Lease Accounting
Effective January 1, 2019,2020, we adopted ASU No. 2016-02, Leases2016-13, Financial Instruments - Credit Losses (Topic 842) and related ASUs326) - Measurement of Credit Losses on Financial Instruments, using the modified retrospective transition approach. This ASU replaces the incurred loss impairment model that recognizes losses when a probable threshold is met with a requirement to recognize lifetime expected credit losses immediately when a financial asset, including receivables, is recorded. The modified retrospective transition approach provides for an “effective date” method for recording leases that existed or were entered into on or after January 1, 2019, without restating prior-period information. Our unconsolidated joint ventures anticipate adopting the new lease standard effective January 1, 2020.
ASC Topic 842 provided several optional practical expedients for use in transition. We elected to use the packageestimate of practical expedients which allowed us toexpected credit losses considers not reassess our previous conclusions about lease identification, lease classification and the accounting treatment for initial direct costs. We did not elect the practical expedient pertaining to the use of hindsight.
The most significant effects of the new standard on our consolidated financial statements are the recognition of new operating lease right-of-use ("ROU") assets and operating lease liabilities on our consolidated balance sheet for operating leases as well as significant new disclosures about our leasing activities as further discussed in Note 18. On January 1, 2019, we recorded “Operating
lease liabilities” of approximately $253 million based on the present value of the remaining lease payments over the lease term. Additionally, we reclassifiedonly historical information, but also current and noncurrent deferred rent of $68 million associated with straight-line accountingfuture economic conditions and tenant incentives related to existing real estate leases against the initial "Operating lease right-of-use assets" as of January 1, 2019. The adoption of the new standard did not have a material impact on our results of operations or cash flows.
events. As a result of the adoption, we recorded a cumulative-effectcumulative effect adjustment to retained earnings of $21$3 million, net of deferred taxestax of $7$1 million, representing the unamortized portion of a deferred gain previously recorded in conjunction with the 2012 sale and leaseback of the office building in Houston, Texas whereon our corporate headquarters is located. We concluded the transaction resulted in the transfer of control of the office building to the buyer-lessor at market terms and therefore would have qualified as a sale under ASC Topic 842 with gain recognition in the period in which the sale was recognized.
We recognized the cumulative effect of initially applying ASC Topic 842 as an adjustment to our assets and liabilities in ouropening consolidated balance sheet as of January 1, 2019, as follows:2020. See Note 22 "Financial Instruments and Risk Management" for further discussion related to credit losses.
|
| | | | | | | | | | | |
| Balance at | | Adjustments Due to | | Balance at |
Dollars in millions | December 31, 2018 | | ASC 842 | | January 1, 2019 |
Assets | | | | | |
Operating lease right-of-use asset | $ | — |
| | $ | 185 |
| | $ | 185 |
|
Other current assets | 108 |
| | (1 | ) | | 107 |
|
Deferred income taxes | 222 |
| | (7 | ) | | 215 |
|
| | | | | |
Liabilities | | | | | |
Operating lease liabilities | — |
| | 40 |
| | 40 |
|
Other current liabilities | 179 |
| | (5 | ) | | 174 |
|
Operating lease liabilities (noncurrent) | — |
| | 213 |
| | 213 |
|
Other liabilities (noncurrent) | 202 |
| | (92 | ) | | 110 |
|
| | | | | |
Shareholders' equity | | | | | |
Retained Earnings | 1,235 |
| | 21 |
| | 1,256 |
|
Revenue Recognition
Practical Expedients and Exemptions
Upon the adoption of ASC 606, we utilized certain practical expedients and exemptions as follows:
We applied the modified-retrospective method upon adoption of ASC Topic 606 which allowed the new accounting standard to be applied only to contracts that were not considered substantially complete as ofEffective January 1, 2018.
2020, we adopted ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. In cases where we have an unconditional right to considerationaddition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a customer in an amount that corresponds directly with the value of our performance completed to date, we recognize revenue in thezero or negative carrying amount to which we haveperform a rightqualitative assessment and, if it fails that qualitative test, to invoiceperform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for services performed.
We do not adjust the contract price for the effects of a significant financing componentreporting unit to determine if the company expects, at contract inception, that the period between when the company transfers a service to a customer and when the customer pays for that service will be one year or less.
We availed ourselves of the SEC Exemption under ASU 2017-13 to defer the application of ASC 606 to most of our unconsolidated joint ventures for one year.
Impact of 606 Adoption
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 | 365 |
| | 87 |
| | 452 |
|
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 | 854 |
| | 144 |
| | 998 |
|
The impact of adoption on our consolidated statement of operations, balance sheet and cash flows for the period ended December 31, 2018 was as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, 2018 |
| As | | Balances Without | | Effect of Change |
Dollars in millions | Reported | | Adoption of ASC 606 | | Higher/(Lower) |
Statement of Operations | | | | | |
Revenues | $ | 4,913 |
| | $ | 4,904 |
| | $ | 9 |
|
Cost of revenues | (4,329 | ) | | (4,328 | ) | | 1 |
|
Equity in earnings of unconsolidated affiliates | 79 |
| | 75 |
| | 4 |
|
Income before income taxes and noncontrolling interests | 396 |
| | 384 |
| | 12 |
|
Provision for income taxes | (86 | ) | | (85 | ) | | 1 |
|
Net income | 310 |
| | 300 |
| | 10 |
|
| | | | | |
EPS | | | | | |
Basic | $ | 1.99 |
| | $ | 1.92 |
| | $ | 0.07 |
|
Diluted | $ | 1.99 |
| | $ | 1.91 |
| | $ | 0.08 |
|
|
| | | | | | | | | | | |
| As of December 31, 2018 |
| As | | Balances Without | | Effect of Change |
Dollars in millions | Reported | | Adoption of ASC 606 | | Higher/(Lower) |
Assets | | | | | |
Accounts receivable | $ | 927 |
| | $ | 594 |
| | $ | 333 |
|
Contract assets | 185 |
| | 496 |
| | (311 | ) |
Other current assets | 108 |
| | 103 |
| | 5 |
|
Equity in and advances to unconsolidated affiliates | 724 |
| | 716 |
| | 8 |
|
Deferred income taxes | 222 |
| | 229 |
| | (7 | ) |
Other assets | 147 |
| | 143 |
| | 4 |
|
| | | | | |
Liabilities | | | | | |
Contract liabilities | 463 |
| | 479 |
| | (16 | ) |
Deferred income taxes | 27 |
| | 28 |
| | (1 | ) |
Deferred income from unconsolidated affiliates | — |
| | 95 |
| | (95 | ) |
Other liabilities | 202 |
| | 202 |
| | — |
|
| | | | | |
Equity | | | | | |
Retained earnings | 1,235 |
| | 1,080 |
| | 155 |
|
Accumulated other comprehensive loss | (910 | ) | | (899 | ) | | (11 | ) |
|
| | | | | | | | | | | |
| Year Ended December 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 | $ | 310 |
| | $ | 300 |
| | $ | 10 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Equity in earnings of unconsolidated affiliates | (79 | ) | | (75 | ) | | (4 | ) |
Deferred income tax (benefit) expense | 26 |
| | 25 |
| | 1 |
|
| | | | | |
Changes in operating assets and liabilities, net of acquired businesses: | | | | | |
Accounts receivable, net of allowances for doubtful accounts | (203 | ) | | 130 |
| | (333 | ) |
Contract assets | 25 |
| | (286 | ) | | 311 |
|
Contract liabilities | (60 | ) | | (77 | ) | | 17 |
|
Other assets and liabilities | (7 | ) | | (5 | ) | | (2 | ) |
Total cash flows used in operating activities | 165 |
| | 165 |
| | — |
|
The impacts of adoption were primarily related to: (1) conforming our contracts recorded over time from previously acceptable methods to the cost-to-cost percentage of completion methodology, (2) combining certain deliverables that were previously considered separate deliverables into a single performance obligation, and (3) separating certain contracts that were previously considered one deliverable into multiple performance obligations.
The impacts of adoption on our balance sheet as of January 1, 2018 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 adopt ASC 606 for each of the remaining unconsolidated Aspire Defence contracting entities effective January 1, 2018.quantitative impairment test is necessary. As a result of the adoption byof this standard in 2020, we used Step 1 to measure the Aspire Defence contracting entities, we identified multiple performance obligations associated withgoodwill impairment losses recognized during the project deliverables that were previously accounted for as a single deliverable under its contract with the MoD. In additionfirst and second quarters of 2020 without proceeding to the above impacts of adoption on revenue and gross margin, the cumulative effectStep 2 of the adoption by Aspire Defence contracting entities resulted in sufficient additional income that had been previously recordedgoodwill impairment test as "Deferred income from unconsolidated affiliates" on our consolidated balance sheets inrequired under the amountprevious standard. See Note 9 "Goodwill and Goodwill Impairment" for discussion of $101 million, which was reversed and included in the cumulative effect adjustment. Also, deferred construction income in the amount of $87 million previously recorded in "Equity in and advance to unconsolidated affiliates" was reversed and included in the cumulative effect adjustment as a result of the early adoption of ASC 606 by the Aspire Defence contracting entities. We deferred the application of ASC 606 to our remaining unconsolidated joint ventures until January 1, 2019.
goodwill impairment recognized.
Effective January 1, 2019,2021, we adopted ASU No. 2017-13, Revenue from Contracts with Customers2019-12, Income Taxes (Topic 606)740): Simplifying the Accounting for our remaining unconsolidated affiliates, usingIncome Taxes. This ASU removes specific exceptions to the modified retrospective approach, except for unconsolidated VIEs associated with the Aspire Defence project for which we adoptedgeneral principles in ASC Topic 606740 related to the incremental approach for intraperiod tax allocation, accounting for basis differences for ownership changes in foreign investments and interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for franchise taxes that are partially based on January 1, 2018. We recognized the cumulative effect of initially applying ASC Topic 606 for our unconsolidated affiliates as an adjustment to our assets and retained earningsincome, transactions with a government that result in a step up in the balance sheet astax basis of January 1, 2019, as follows:
|
| | | | | | | | | | | |
| Balance at | | Adjustments Due to | | Balance at |
Dollars in millions | December 31, 2018 | | ASC 606 | | January 1, 2019 |
Assets | | | | | |
Equity in and advances to unconsolidated affiliates | $ | 724 |
| | $ | 29 |
| | $ | 753 |
|
| | | | | |
Shareholders' equity | | | | | |
Retained Earnings | 1,235 |
| | 29 |
| | 1,264 |
|
Other Standards
Effective January 1, 2019, we adopted ASU No. 2017-12, Derivativesgoodwill, separate financial statements of legal entities that are not subject to tax and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedge Activities, using the modified retrospective approach. This ASU is intended to improve and simplify accounting rules related to hedge accounting.enacted changes in tax laws in interim periods. The adoption of this ASUstandard did not have a material impact to our financial statements.
Effective January 1, 2019, we adopted ASU No. 2018-16, Inclusion of the Secured Overnight Financing Rate Overnight Index Swap Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. As a result, entities may designate changes in this rate as the hedged risk in hedges of interest rate risk for fixed-rate financial instruments. The adoption of ASU 2018-16 did not have any impact on our financial position, results of operations or cash flows.
EffectiveIn January 1, 2019,2021. we adopted ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). Under2018-14, Disclosure Framework - Changes to the new standard, we did not electDisclosure Requirements for Defined Benefit Plans. This ASU amends ASC 715 to reclassify the income tax effects stranded in AOCLadd, remove and clarify certain disclosure requirements related to retained earnings as a result of the enactment of comprehensive tax legislation, commonly referred to as the Tax Cutsdefined benefit pension and Jobs Act of 2017. Therefore, theother post-retirement plans. The adoption of this ASU had nostandard did not have impact on our financial statements.position, results of operations or cash flows.
Note 2. Business Segment Information
We provide a wide range of professional services and the management of our business is heavily focused on major projects or programs within each of our reportable segments. At any given time, a relatively few number of projects, government programs and joint ventures
represent a substantial part of our operations. Our reportable segments follow the same accounting policies as those described in Note 1 to our consolidated financial statements.
We are organized into 32 core business segments, Government Solutions and Sustainable Technology Solutions and Energy Solutions,
and 21 non-core business segmentssegment as described below:
Government Solutions. Our GSGovernment Solutions business segment provides full life-cycle support solutions to defense, intelligence, space, aviation and other programs and missions for military and other government agencies primarily in the U.S., U.K. and Australia. KBR coversKBR's services cover the full spectrum fromspanning research and development; throughdevelopment, advanced prototyping, acquisition support, systems engineering, C4ISR, cyber analytics, space domain awareness, test and evaluation, systems integration and program
management; to management, global supply chain management and operations support, maintenancereadiness and field logistics. Our acquisitions as describedsupport. With the acquisition of Frazer-Nash Consultancy Limited ("Frazer-Nash") on October 20, 2021 (described in Note 4 to ourthe consolidated financial statements have been fully integrated withstatements), our existing operations.GS business segment also provides a broad range of professional advisory services to deliver high-end systems engineering, systems assurance and technology to customers across the defense, energy and critical infrastructure sectors primarily in the U.K. and Australia.
Sustainable Technology Solutions. Our TSSustainable Technology Solutions business segment combines KBR'sis anchored by our portfolio of over 70 innovative, proprietary, sustainability-focused process technologies equipmentthat we license spanning 4 primary areas: ammonia/syngas/fertilizers, chemical/petrochemicals, clean refining and catalyst supplycircular process/circular economy solutions. STS also includes our highly synergistic advisory and associated knowledge-basedconsulting practice focused on energy transition and net-zero carbon emission consulting, our high-end engineering, design and professional services into a global business for refining, petrochemicals, inorganic and specialty chemicalsofferings, as well as gasification, syngas, ammonia, nitric acidour technology-led industrial solutions build on our KBR INSITE® platform. KBR INSITE® is a proprietary, digital, cloud-based operations and fertilizers.maintenance platform that identifies opportunities for our clients to achieve sustainable improvements in production, reliability, environment impact, energy efficiency and ultimately profitability. From early planning through scope definition, advanced technologies and projectfacility life-cycle support, our TSSTS business segment works closely with customers to provide what we believe is the optimal approach to maximize their return on investment.
Energy Solutions.
Our ES business segment provides full life-cycle support solutions across the upstream, midstream and downstream hydrocarbons markets. We provide comprehensive project and program delivery capabilities as well as engineering services front-end consulting and feasibility studies, sustaining capital construction, turnarounds, maintenance services, and more. Our key capabilities leverage our operational and technical excellence as a global provider of EPC and high-impact consulting and engineering services for onshore oil and gas; LNG/GTL; oil refining; petrochemicals; chemicals; fertilizers; offshore oil and gas; and floating solutions.
Non-strategic Business. Our Non-strategic Business segment represents the operations or activities we determine are no longer core to our business strategy and that we have exited or intend to exit upon completion of existing contracts. All Non-Strategic Business projects are substantially complete. Current activities in this business segment primarily relate to final project close-out, negotiation and settlement of claims, joint venture liquidation and various other matters associated with these projects.
Effective for the quarter ended September 30, 2019, we reported the results of joint venture operations related to a project in Latin America within our Non-strategic Business segment. The reclassification results from our decision during the quarter to wind down the operating activities of the joint venture and exit the business. Equity in earnings of unconsolidated affiliates related to this joint venture were previously reported in our Energy Solutions business segment and were losses of $13 million and $3 million for the years ended December 31, 2019 and 2018, respectively.
Other. Our non-core Other segment includes corporate expenses and selling, general and administrative expenses not allocated to the business segments above.
The following table presents revenues, gross profit (loss), equity in earnings of unconsolidated affiliates, selling, general and administrative expenses, acquisition and integration related costs, gain on disposition of assets, gain on consolidation of Aspire entities and operating income (loss) by reporting segment.
Operations by Reportable Segment
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
Dollars in millions | 2021 | | 2020 | | 2019 |
Revenues: | | | | | |
Government Solutions | $ | 6,149 | | | $ | 4,055 | | | $ | 4,042 | |
Sustainable Technology Solutions | 1,190 | | | 1,712 | | | 1,597 | |
| | | | | |
Total revenues | $ | 7,339 | | | $ | 5,767 | | | $ | 5,639 | |
Gross profit: | | | | | |
Government Solutions | $ | 575 | | | $ | 493 | | | $ | 444 | |
Sustainable Technology Solutions | 231 | | | 173 | | | 209 | |
| | | | | |
Total gross profit | $ | 806 | | | $ | 666 | | | $ | 653 | |
Equity in earnings (losses) of unconsolidated affiliates: | | | | | |
Government Solutions | $ | 29 | | | $ | 28 | | | $ | 29 | |
Sustainable Technology Solutions | (199) | | | 2 | | | 6 | |
| | | | | |
Total equity in earnings (losses) of unconsolidated affiliates | $ | (170) | | | $ | 30 | | | $ | 35 | |
Selling, general and administrative expenses: | | | | | |
Government Solutions | $ | (192) | | | (163) | | | (135) | |
Sustainable Technology Solutions | (72) | | | (83) | | | (90) | |
Other | (129) | | | (89) | | | (116) | |
Total selling, general and administrative expenses | $ | (393) | | | (335) | | | (341) | |
| | | | | |
Acquisition and integration related costs | (12) | | | (9) | | | (2) | |
Goodwill impairment | — | | | (99) | | | — | |
Restructuring charges and asset impairments | (2) | | | (214) | | | — | |
Gain on disposition of assets | 2 | | | 18 | | | 17 | |
Operating income | $ | 231 | | | $ | 57 | | | $ | 362 | |
Interest expense | (92) | | | (83) | | | (99) | |
Other non-operating income (expense) | (5) | | | 1 | | | 5 | |
Income (loss) before income taxes and noncontrolling interests | $ | 134 | | | $ | (25) | | | $ | 268 | |
|
| | | | | | | | | | | |
| Years ended December 31, |
Dollars in millions | 2019 | | 2018 | | 2017 |
Revenues: | | | | | |
Government Solutions | $ | 3,925 |
| | $ | 3,457 |
| | $ | 2,193 |
|
Technology Solutions | 374 |
| | 297 |
| | 269 |
|
Energy Solutions | 1,339 |
| | 1,157 |
| | 1,671 |
|
Subtotal | 5,638 |
| | 4,911 |
| | 4,133 |
|
Non-strategic Business | 1 |
| | 2 |
| | 38 |
|
Total | $ | 5,639 |
| | $ | 4,913 |
| | $ | 4,171 |
|
Gross profit (loss): | | | | | |
Government Solutions | $ | 430 |
| | $ | 350 |
| | $ | 188 |
|
Technology Solutions | 118 |
| | 106 |
| | 98 |
|
Energy Solutions | 100 |
| | 134 |
| | 153 |
|
Subtotal | 648 |
| | 590 |
| | 439 |
|
Non-strategic Business | 5 |
| | (6 | ) | | — |
|
Total | $ | 653 |
| | $ | 584 |
| | $ | 439 |
|
Equity in earnings of unconsolidated affiliates: | | | | | |
Government Solutions | $ | 29 |
| | $ | 32 |
| | $ | 43 |
|
Technology Solutions | — |
| | — |
| | — |
|
Energy Solutions | 19 |
| | 50 |
| | 27 |
|
Subtotal | 48 |
| | 82 |
| | 70 |
|
Non-strategic Business | (13 | ) | | (3 | ) | | — |
|
Total | $ | 35 |
| | $ | 79 |
| | $ | 70 |
|
Selling, general and administrative expenses: | | | | | |
Government Solutions | $ | (134 | ) | | (109 | ) | | (57 | ) |
Technology Solutions | (28 | ) | | (24 | ) | | (25 | ) |
Energy Solutions | (63 | ) | | (64 | ) | | (68 | ) |
Other | (116 | ) | | (97 | ) | | (94 | ) |
Subtotal | (341 | ) | | (294 | ) | | (244 | ) |
Non-strategic Business | — |
| | — |
| | — |
|
Total | $ | (341 | ) | | (294 | ) | | (244 | ) |
Acquisition and integration related costs: | | | | | |
Government Solutions | $ | (2 | ) | | (7 | ) | | — |
|
Technology Solutions | — |
| | — |
| | — |
|
Energy Solutions | — |
| | — |
| | — |
|
Other | — |
| | — |
| | — |
|
Subtotal | (2 | ) | | (7 | ) | | — |
|
Non-strategic Business | — |
| | — |
| | — |
|
Total | $ | (2 | ) | | (7 | ) | | — |
|
Asset impairment and restructuring charges | | | | | |
Government Solutions | $ | — |
| | $ | — |
| | $ | — |
|
Technology Solutions | — |
| | — |
| | — |
|
Energy Solutions | — |
| | — |
| | (6 | ) |
Other | — |
| | — |
| | — |
|
Subtotal | — |
| | — |
| | (6 | ) |
Non-strategic Business | — |
| | — |
| | — |
|
Total | $ | — |
| | $ | — |
| | $ | (6 | ) |
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
Dollars in millions | 2021 | | 2020 | | 2019 |
Capital expenditures: | | | | | |
Government Solutions | $ | 18 | | | $ | 13 | | | $ | 7 | |
Sustainable Technology Solutions | 2 | | | 3 | | | 4 | |
Other | 10 | | | 4 | | | 9 | |
Total | $ | 30 | | | $ | 20 | | | $ | 20 | |
Depreciation and amortization: | | | | | |
Government Solutions | $ | 108 | | | $ | 60 | | | $ | 61 | |
Sustainable Technology Solutions | 16 | | | 26 | | | 23 | |
Other | 22 | | | 29 | | | 20 | |
Total | $ | 146 | | | $ | 115 | | | $ | 104 | |
|
| | | | | | | | | | | |
| Years ended December 31, |
Dollars in millions | 2019 | | 2018 | | 2017 |
Gain (loss) on disposition of assets: | | | | | |
Government Solutions | 12 |
| | 4 |
| | — |
|
Technology Solutions | — |
| | — |
| | — |
|
Energy Solutions | — |
| | (2 | ) | | 5 |
|
Other | 5 |
| | (4 | ) | | — |
|
Subtotal | 17 |
| | (2 | ) | | 5 |
|
Non-strategic Business | — |
| | — |
| | — |
|
Total | 17 |
| | (2 | ) | | 5 |
|
Gain on consolidation of Aspire entities: | | | | | |
Government Solutions | — |
| | 113 |
| | — |
|
Technology Solutions | — |
| | — |
| | — |
|
Energy Solutions | — |
| | — |
| | — |
|
Other | — |
| | (5 | ) | | — |
|
Subtotal | — |
| | 108 |
| | — |
|
Non-strategic Business | — |
| | — |
| | — |
|
Total | — |
| | 108 |
| | — |
|
Segment operating income (loss): | | | | | |
Government Solutions | $ | 335 |
| | $ | 383 |
| | $ | 173 |
|
Technology Solutions | 90 |
| | 82 |
| | 73 |
|
Energy Solutions | 56 |
| | 118 |
| | 111 |
|
Other | (111 | ) | | (106 | ) | | (93 | ) |
Subtotal | 370 |
| | 477 |
| | 264 |
|
Non-strategic Business | (8 | ) | | (9 | ) | | — |
|
Total | $ | 362 |
| | $ | 468 |
| | $ | 264 |
|
|
| | | | | | | | | | | |
| Years ended December 31, |
Dollars in millions | 2019 | | 2018 | | 2017 |
Capital expenditures: | | | | | |
Government Solutions | $ | 7 |
| | $ | 11 |
| | $ | 4 |
|
Technology Solutions | 1 |
| | — |
| | — |
|
Energy Solutions | 3 |
| | 1 |
| | 2 |
|
Other | 9 |
| | 5 |
| | 2 |
|
Subtotal | 20 |
| | 17 |
| | 8 |
|
Non-strategic Business | — |
| | — |
| | — |
|
Total | $ | 20 |
| | $ | 17 |
| | $ | 8 |
|
Depreciation and amortization: | | | | | |
Government Solutions | $ | 58 |
| | $ | 42 |
| | $ | 27 |
|
Technology Solutions | 6 |
| | 3 |
| | 3 |
|
Energy Solutions | 21 |
| | 10 |
| | 10 |
|
Other | 19 |
| | 8 |
| | 8 |
|
Subtotal | 104 |
| | 63 |
| | 48 |
|
Non-strategic Business | — |
| | — |
| | — |
|
Total | $ | 104 |
| | $ | 63 |
| | $ | 48 |
|
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 1000 contracts, we generally 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 during the periods presented, are as follows:
We recognized changes to equity earnings as a result of various changes to estimates on the Ichthys LNG Project during the years ended December 31, 2018 and 2017. See Note 8 for a discussion of the matters impacting this project. We also recognized a favorable change in estimated revenues and net income associated with variable consideration recognized as a result of successful completion and performance testing of a major ES project during the year ended December 31, 2018.
During the year ended December 31, 2017, the PEMEX and PEP arbitration was settled (see Note 17 to our consolidated financial statements) which resulted in additional revenues and gross profit of $35 million during the year ended December 31, 2017.
Balance Sheet Information by Reportable Segment
Assets specific to business segments include receivables, contract assets, other current assets, claims and accounts receivable, certain identified property, plant and equipment, equity in and advances to related companies and goodwill. The remaining assets, such as cash and the remaining property, plant and equipment, are considered to be shared among the business segments and are therefore reported in "Other."
| | | | | | | | | | | |
| December 31, |
Dollars in millions | 2021 | | 2020 |
Total assets: | | | |
Government Solutions | $ | 4,245 | | | $ | 3,379 | |
Sustainable Technology Solutions | 1,145 | | | 1,440 | |
Other | 809 | | | 886 | |
Total | $ | 6,199 | | | $ | 5,705 | |
Goodwill (Note 9): | | | |
Government Solutions | $ | 1,890 | | | $ | 1,589 | |
Sustainable Technology Solutions | 170 | | | 172 | |
| | | |
Total | $ | 2,060 | | | $ | 1,761 | |
Equity in and advances to related companies (Note 10): | | | |
Government Solutions | $ | 126 | | | $ | 145 | |
Sustainable Technology Solutions | 450 | | | 736 | |
| | | |
Total | $ | 576 | | | $ | 881 | |
|
| | | | | | | |
| December 31, |
Dollars in millions | 2019 | | 2018 |
Total assets: | | | |
Government Solutions | $ | 2,749 |
| | $ | 2,804 |
|
Technology Solutions | 222 |
| | 204 |
|
Energy Solutions | 1,497 |
| | 1,271 |
|
Other | 889 |
| | 746 |
|
Subtotal | 5,357 |
| | 5,025 |
|
Non-strategic Business | 7 |
| | 27 |
|
Total | $ | 5,364 |
| | $ | 5,052 |
|
Goodwill (Note 11): | | | |
Government Solutions | $ | 978 |
| | $ | 977 |
|
Technology Solutions | 50 |
| | 51 |
|
Energy Solutions | 237 |
| | 237 |
|
Other | — |
| | — |
|
Subtotal | 1,265 |
| | 1,265 |
|
Non-strategic Business | — |
| | — |
|
Total | $ | 1,265 |
| | $ | 1,265 |
|
Equity in and advances to related companies (Note 12): | | | |
Government Solutions | $ | 151 |
| | $ | 114 |
|
Technology Solutions | — |
| | — |
|
Energy Solutions | 699 |
| | 610 |
|
Other | — |
| | — |
|
Subtotal | 850 |
| | 724 |
|
Non-strategic Business | — |
| | — |
|
Total | $ | 850 |
| | $ | 724 |
|
Selected Geographic Information
Revenues by countrygeography are determined based on the location of services provided. Long-lived assets by country are determined based on the location of tangible assets.
| | | Years ended December 31, | | Years ended December 31, |
Dollars in millions | 2019 | | 2018 | | 2017 | Dollars in millions | 2021 | | 2020 | | 2019 |
Revenues: | | | | | | Revenues: | | | | | |
United States | $ | 2,705 |
| | $ | 2,260 |
| | $ | 1,986 |
| United States | $ | 4,923 | | | $ | 3,031 | | | $ | 2,705 | |
Middle East | 1,027 |
| | 884 |
| | 836 |
| Middle East | 590 | | | 857 | | | 1,027 | |
Europe | 1,058 |
| | 989 |
| | 480 |
| Europe | 1,039 | | | 961 | | | 1,058 | |
Australia | 288 |
| | 329 |
| | 334 |
| Australia | 367 | | | 324 | | | 288 | |
Canada | 39 |
| | 21 |
| | 224 |
| Canada | 3 | | | 46 | | | 39 | |
Africa | 197 |
| | 133 |
| | 121 |
| Africa | 179 | | | 152 | | | 197 | |
Asia | 214 |
| | 190 |
| | 125 |
| Asia | 199 | | | 203 | | | 214 | |
Other countries | 111 |
| | 107 |
| | 65 |
| Other countries | 39 | | | 193 | | | 111 | |
Total | $ | 5,639 |
| | $ | 4,913 |
| | $ | 4,171 |
| Total | $ | 7,339 | | | $ | 5,767 | | | $ | 5,639 | |
| | | | | | | | | | | |
| December 31, |
Dollars in millions | 2021 | | 2020 |
Property, plant & equipment, net: | | | |
United States | $ | 70 | | | $ | 70 | |
United Kingdom | 49 | | | 45 | |
Other | 17 | | | 15 | |
Total | $ | 136 | | | $ | 130 | |
|
| | | | | | | |
| December 31, |
Dollars in millions | 2019 | | 2018 |
Property, plant & equipment, net: | | | |
United States | $ | 50 |
| | $ | 51 |
|
United Kingdom | 44 |
| | 50 |
|
Other | 36 |
| | 20 |
|
Total | $ | 130 |
| | $ | 121 |
|
Note 3. Revenue
Disaggregated Revenue
We disaggregate our revenue from customers by type of service,business unit, 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 linebusiness unit and reportable segment was as follows:
|
| | | | | | | |
| Year Ended |
| December 31, |
Dollars in millions | 2019 | | 2018 |
Government Solutions | | | |
Space and Mission Solutions | $ | 874 |
| | $ | 651 |
|
Engineering | 1,158 |
| | 1,141 |
|
Logistics | 1,893 |
| | 1,665 |
|
Subtotal | 3,925 |
| | 3,457 |
|
| | | |
Technology Solutions | 374 |
| | 297 |
|
| | | |
Energy Solutions | | | |
EPC Delivery Solutions | 438 |
| | 432 |
|
Services and Consulting | 901 |
| | 725 |
|
Subtotal | 1,339 |
| | 1,157 |
|
| | | |
Non-strategic business | 1 |
| | 2 |
|
| | | |
Total net revenue | $ | 5,639 |
| | $ | 4,913 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | | | |
Dollars in millions | | | | | 2021 | | 2020 | | 2019 | | | | | | |
| | | | | | | | | | | | | | | |
Government Solutions | | | | | | | | | | | | | | | |
Science & Space | | | | | $ | 1,018 | | | $ | 967 | | | $ | 863 | | | | | | | |
Defense & Intel | | | | | 1,475 | | | 959 | | | 782 | | | | | | | |
Readiness & Sustainment | | | | | 2,644 | | | 1,153 | | | 1,400 | | | | | | | |
International | | | | | 1,012 | | | 976 | | | 997 | | | | | | | |
Total Government Solutions | | | | | 6,149 | | | 4,055 | | | 4,042 | | | | | | | |
| | | | | | | | | | | | | | | |
Sustainable Technology Solutions | | | | | 1,190 | | | 1,712 | | | 1,597 | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total revenue | | | | | $ | 7,339 | | | $ | 5,767 | | | $ | 5,639 | | | | | | | |
Government Solutions revenue earned from key U.S. Governmentgovernment customers includingincludes U.S. DoD agencies and NASA, was $3.0 billion and $2.6 billion for the years ended December 31, 2019is reported as Science & Space Solutions, Defense & Intel, Readiness & Sustainment and 2018, respectively.International. Government Solutions revenue earned from non-U.S. Governmentgovernment customers includingprimarily includes the U.K. MoD and the Australian Defence Force, and others was $911 million and $847 million for the years ended December 31, 2019 and 2018, respectively.is reported as International.
Revenue by geographic destination was as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
Dollars in millions | Government Solutions | | Technology Solutions | | Energy Solutions | | Non-strategic Business | | Total |
United States | $ | 2,110 |
| | $ | 38 |
| | $ | 556 |
| | $ | 1 |
| | $ | 2,705 |
|
Middle East | 795 |
| | 15 |
| | 217 |
| | — |
| | 1,027 |
|
Europe | 796 |
| | 71 |
| | 191 |
| | — |
| | 1,058 |
|
Australia | 93 |
| | 1 |
| | 194 |
| | — |
| | 288 |
|
Canada | 1 |
| | 1 |
| | 37 |
| | — |
| | 39 |
|
Africa | 76 |
| | 31 |
| | 90 |
| | — |
| | 197 |
|
Asia | — |
| | 211 |
| | 3 |
| | — |
| | 214 |
|
Other countries | 54 |
| | 6 |
| | 51 |
| | — |
| | 111 |
|
Total net revenue | $ | 3,925 |
| | $ | 374 |
| | $ | 1,339 |
| | $ | 1 |
| | $ | 5,639 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| | | | | | | | | |
Dollars in millions | Government Solutions | | Sustainable Technology Solutions | | | | | | Total |
United States | $ | 4,493 | | | $ | 430 | | | | | | | $ | 4,923 | |
Middle East | 393 | | | 197 | | | | | | | 590 | |
Europe | 816 | | | 223 | | | | | | | 1,039 | |
Australia | 351 | | | 16 | | | | | | | 367 | |
Canada | 1 | | | 2 | | | | | | | 3 | |
Africa | 87 | | | 92 | | | | | | | 179 | |
Asia | 7 | | | 192 | | | | | | | 199 | |
Other countries | 1 | | | 38 | | | | | | | 39 | |
Total revenue | $ | 6,149 | | | $ | 1,190 | | | | | | | $ | 7,339 | |
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2018 |
Dollars in millions | Government Solutions | | Technology Solutions | | Energy Solutions | | Non-strategic Business | | Total |
United States | $ | 1,767 |
| | $ | 22 |
| | $ | 469 |
| | $ | 2 |
| | $ | 2,260 |
|
Middle East | 735 |
| | 14 |
| | 135 |
| | — |
| | 884 |
|
Europe | 766 |
| | 50 |
| | 173 |
| | — |
| | 989 |
|
Australia | 60 |
| | 1 |
| | 268 |
| | — |
| | 329 |
|
Canada | 1 |
| | 2 |
| | 18 |
| | — |
| | 21 |
|
Africa | 77 |
| | 25 |
| | 31 |
| | — |
| | 133 |
|
Asia | — |
| | 177 |
| | 13 |
| | — |
| | 190 |
|
Other countries | 51 |
| | 6 |
| | 50 |
| | — |
| | 107 |
|
Total net revenue | $ | 3,457 |
| | $ | 297 |
| | $ | 1,157 |
| | $ | 2 |
| | $ | 4,913 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| | | | | | | | | |
Dollars in millions | Government Solutions | | Sustainable Technology Solutions | | | | | | Total |
United States | $ | 2,280 | | | $ | 751 | | | | | | | $ | 3,031 | |
Middle East | 622 | | (a) (b) | 235 | | | | | | | 857 | |
Europe | 743 | | | 218 | | | | | | | 961 | |
Australia | 272 | | | 52 | | | | | | | 324 | |
Canada | 1 | | | 45 | | | | | | | 46 | |
Africa | 81 | | | 71 | | | | | | | 152 | |
Asia | — | | | 203 | | | | | | | 203 | |
Other countries | 56 | | | 137 | | | | | | | 193 | |
Total revenue | $ | 4,055 | | | $ | 1,712 | | | | | | | $ | 5,767 | |
| | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
| | | | | | | | | |
Dollars in millions | Government Solutions | | Sustainable Technology Solutions | | | | | | Total |
United States | $ | 2,110 | | | $ | 595 | | | | | | | $ | 2,705 | |
Middle East | 795 | | (a) (b) | 232 | | | | | | | 1,027 | |
Europe | 796 | | | 262 | | | | | | | 1,058 | |
Australia | 209 | | | 79 | | | | | | | 288 | |
Canada | 1 | | | 38 | | | | | | | 39 | |
Africa | 76 | | | 121 | | | | | | | 197 | |
Asia | — | | | 214 | | | | | | | 214 | |
Other countries | 55 | | | 56 | | | | | | | 111 | |
Total revenue | $ | 4,042 | | | $ | 1,597 | | | | | | | $ | 5,639 | |
Many of our contracts contain both fixed price, and cost reimbursable and time-and-material components. We define contract type based on the component that represents the majority of the contract. Revenue by contract type was as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
Dollars in millions | Government Solutions | | Technology Solutions | | Energy Solutions | | Non-strategic Business | | Total |
Fixed Price | $ | 1,111 |
| | $ | 367 |
| | $ | 240 |
| | $ | 1 |
| | $ | 1,719 |
|
Cost Reimbursable | 2,814 |
| | 7 |
| | 1,099 |
| | — |
| | 3,920 |
|
Total net revenue | $ | 3,925 |
| | $ | 374 |
| | $ | 1,339 |
| | $ | 1 |
| | $ | 5,639 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| | | | | |
Dollars in millions | Government Solutions | | Sustainable Technology Solutions | | Total |
Cost Reimbursable | $ | 4,175 | | | $ | — | | | $ | 4,175 | |
Time-and-Materials | 903 | | | 739 | | | $ | 1,642 | |
Fixed Price | 1,071 | | | 451 | | | $ | 1,522 | |
Total revenue | $ | 6,149 | | | $ | 1,190 | | | $ | 7,339 | |
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2018 |
Dollars in millions | Government Solutions | | Technology Solutions | | Energy Solutions | | Non-strategic Business | | Total |
Fixed Price | $ | 1,031 |
| | $ | 288 |
| | $ | 187 |
| | $ | 2 |
| | $ | 1,508 |
|
Cost Reimbursable | 2,426 |
| | 9 |
| | 970 |
| | — |
| | 3,405 |
|
Total net revenue | $ | 3,457 |
| | $ | 297 |
| | $ | 1,157 |
| | $ | 2 |
| | $ | 4,913 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| | | | | |
Dollars in millions | Government Solutions | | Sustainable Technology Solutions | | Total |
Cost Reimbursable | $ | 2,409 | | | $ | — | | | $ | 2,409 | |
Time-and-Materials | 608 | | | 1,215 | | | 1,823 | |
Fixed Price | 1,038 | | | 497 | | | 1,535 | |
Total revenue | $ | 4,055 | | | $ | 1,712 | | | $ | 5,767 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
| | | | | |
Dollars in millions | Government Solutions | | Sustainable Technology Solutions | | Total |
Cost Reimbursable | $ | 2,501 | | | $ | — | | | $ | 2,501 | |
Time-and-Materials | 452 | | | 1,077 | | | 1,529 | |
Fixed Price | 1,089 | | | 520 | | | 1,609 | |
Total revenue | $ | 4,042 | | | $ | 1,597 | | | $ | 5,639 | |
Performance Obligations
We recognized revenue of $19 million, $49 million and $15 million from performance obligations satisfied in previous periods for the yearyears ended December 31, 2019.2021, 2020 and 2019, respectively.
On December 31, 2019,2021, we had $11.4$11.7 billion of transaction price allocated to remaining performance obligations. We expect to recognize approximately 34%31% of our remaining performance obligations as revenue within one year, 33%34% in years two through five and 33%35% 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 remainingRemaining performance obligations doesdo not include variable consideration that was determined to be constrained as of December 31, 2019.2021.
Contract Assets and Contract Liabilities
Contract assets were $224 million and $178 million and contract liabilities were $313 million and $356 million, at December 31, 2021 and 2020, respectively. The increase in contract assets was primarily attributed to revenue recognized on certain contracts partially offset by the timing of billings. The decrease in contract liabilities was due to the timing of advance payments and revenue recognized during the period. We recognized revenue of $194 million for the year ended December 31, 2021, which was previously included in the contract liability balance at December 31, 2020.
Accounts Receivable
| | | | | | | | | | | |
| December 31, |
Dollars in millions | 2021 | | 2020 |
Unbilled | $ | 698 | | | $ | 476 | |
Trade & other | 713 | | | 423 | |
Accounts receivable, net | $ | 1,411 | | | $ | 899 | |
Note 4. Acquisitions and Dispositions
Stinger Ghaffarian Technologies Acquisition
Frazer-Nash Consultancy Limited
On April 25, 2018,October 20, 2021, we acquired 100% of the outstanding stock of SGT. SGT isFrazer-Nash in accordance with an agreement with Babcock International Group PLC, a leading UK based provider of high-valuespecialist systems, engineering mission operations, scientific and IT software solutionstechnology solutions. The acquired business of Frazer-Nash provides innovative engineering and technology related professional advisory services across the defense, energy and critical infrastructure sectors primarily in the government services market.U.K. and Australia. It is reported within our GS business segment. We accounted for this transaction using the acquisition method under ASC 805, Business Combinations. The aggregate consideration paid was approximately $392 million in cash, subject to other post-closing adjustments. The Company funded the acquisition through a combination of cash on-hand and borrowings under the Revolver.
During the year ended December 31, 2021, the Company incurred $4 million in acquisition-related costs with the acquisition of Frazer-Nash, which are included in acquisition and integration related costs on the consolidated statements of operations. The acquired Frazer-Nash business contributed $31 million of revenues and $2 million of gross profit within our GS business segment during the year ended December 31, 2021.
As of December 31, 2021, the estimated fair values of net assets acquired were preliminary, with possible updates primarily in our finalization of tax returns. The following table summarizes the consideration paid for this acquisition and the fair value of assets and liabilities assumed as of the acquisition date as follows:
| | | | | |
Dollars in millions | Frazer-Nash |
Fair value of total consideration paid | $ | 392 | |
Recognized amounts of identifiable assets acquired and liabilities assumed: | |
Cash and equivalents | 7 | |
Accounts receivable | 33 | |
Other current assets | 5 | |
Total current assets | 45 | |
Property, plant, and equipment, net | 6 | |
Operating lease right-of-use assets | 6 | |
Intangible assets, net | 89 | |
| |
| |
Total assets | 146 | |
| |
Accounts payable | 13 | |
| |
| |
| |
Other current liabilities | 6 | |
Total current liabilities | 19 | |
| |
Deferred income taxes | 21 | |
Operating lease liabilities | 6 | |
| |
Total liabilities | 46 | |
| |
Net assets acquired | 100 | |
Goodwill | $ | 292 | |
The goodwill recognized of $292 million arising from this acquisition primarily relates to future growth opportunities based on an expanded service offering from intellectual capital and a highly skilled assembled workforce and other expected synergies from the combined operations. For U.S. tax purposes, the transaction is treated as a stock deal. As a result, there is no step-up in tax basis and the goodwill recognized is not deductible for tax purposes.
The following table summarizes the fair value of intangible assets and the related weighted-average useful lives:
| | | | | | | | | | | |
Dollars in millions | Fair Value | | Weighted Average Amortization Period (in years) |
Backlog | $ | 10 | | | 1 |
Customer relationships | 79 | | | 16 |
Total intangible assets | $ | 89 | | | 14 |
The backlog intangible asset is comprised solely of contracted orders that had not yet been fulfilled. The customer relationships intangible assets consists of established relationships with existing customers that resulted in repeat purchases and customer loyalty. The backlog and customer relationships intangible assets were valued using the income approach, specifically the multi-period excess earnings method in which the value is derived from an estimation of the after-tax cash flows specifically attributable to backlog and customer relationships. The analysis included assumptions for forecasted revenues and EBITDA margins, contributory asset charge rates, weighted average cost of capital and a tax amortization benefit.
Harmonic Limited
On July 1, 2021, we acquired certain assets and assumed certain liabilities of Harmonic Limited ("Harmonic"). The acquired business of Harmonic provides transformation and delivery consultancy project services to UK businesses and is reported within our GS business segment. Aggregate base considerationWe accounted for this transaction as an acquisition of a business using the acquisition method under ASC 805, Business Combinations. The agreed-upon purchase price for the acquisition was $355$19 million,, plus $10 which consisted of cash paid at closing of $17 million, funded from cash on hand and contingent consideration with an estimated fair value of $2 million that is contingent upon the achievement of certain performance targets over the period from closing through March 31, 2024. We recognized $2 million as an intangible backlog asset, $3 million in net working capital and other purchase price adjustments set forth in the purchase agreement. We recognized goodwill of $257$14 million arising from the acquisition. Weacquisition, which relates primarily to future growth opportunities. As of December 31, 2021, the estimated fair values of net assets acquired were preliminary. The goodwill recognized is not deductible for tax purposes.
Centauri Platform Holdings, LLC
On October 1, 2020, we acquired Centauri in accordance with an agreement and plan of merger, pursuant to which a wholly owned subsidiary of KBR merged with and into Centauri, with Centauri continuing as the surviving company and a wholly owned subsidiary of KBR. Centauri provides high-end engineering and development solutions for critical, well-funded, national security missions associated with space, intelligence, cyber and emerging technologies such as directed energy and missile defense and is reported under the GS business segment. The acquisition expands KBR's military space and intelligence business and builds upon the Company's existing cybersecurity and missile defense solutions. Furthermore, the addition of Centauri advances KBR's strategic transformation of becoming a leading provider of high-end, mission-critical technical services and solutions.
The aggregate consideration paid was approximately $830 million. The Company funded the acquisition through a combination of cash on-hand, borrowings under our Senior Credit Facility, net proceeds from the private offering of $250 million aggregate principal amount of our 4.750% Senior Notes due 2028 (the "Senior Notes") and proceeds from the sale of receivables. See Note 12 "Debt and Other Credit Facilities" for further discussion of our Senior Credit Facility and Senior Notes and Note 22 "Fair Value of Financial Instruments and Risk Management" for further discussion of our sale of receivables.
During the years ended December 31, 2021 and 2020, the Company recognized direct, incremental costs related to this acquisition of $2$6 million and $4$9 million, during the years ended December 31,
2019 and 2018, respectively. These costsrespectively, which are included in "Acquisitionacquisition and integration related costs"costs on the consolidated statements of operations.
The acquired SGTCentauri business contributed $481 million and $342$125 million of revenues and $47 million and $31$19 million of gross profit during the years ended December 31, 2019 and 2018, respectively.
Aspire Defence Subcontracting Joint Ventures
Effective January 15, 2018, as a result of our joint venture partner's compulsory liquidation, we assumed operational control of and began consolidating the Aspire Defence subcontracting entities in our consolidated financial statements. We accounted for these transactions under the acquisition method of accounting for business combinations and recognized a gain of approximately $108 million included in "Gain on consolidation of Aspire subcontracting entities" as a result of remeasuring our equity interests in each of the subcontracting entities to fair value. We also recognized goodwill of approximately $42 million.
We subsequently completed the purchase of our partner's interests in the subcontracting entities on April 18, 2018 for $50 million pursuant to a share and business purchase agreement and approval by Aspire Defence Limited, the Aspire Defence Limited project lenders and the MoD. We accounted for the change in ownership interests as an equity transaction. The difference between the noncontrolling interests of $119 million in the subcontracting entities at the date of acquisition and the cash consideration paid to our partner was recognized as a net increase to "PIC" of $69 million. We incurred $1 million of acquisition-related costs for the year ended December 31, 2018, which2020.
The purchase price allocation for the Centauri business combination is final as of December 31, 2021. No purchase price allocation adjustments were recorded during the measurement period. The following table summarizes the consideration paid for this acquisition and the fair value of assets and liabilities assumed as of the acquisition date as follows:
| | | | | |
Dollars in millions | Centauri |
Fair value of total consideration paid | $ | 830 | |
Recognized amounts of identifiable assets acquired and liabilities assumed: | |
Cash and equivalents | 7 | |
Accounts receivable | 78 | |
Contract assets | 19 | |
Other current assets | 1 | |
Total current assets | 105 | |
Property, plant, and equipment, net | 18 | |
Operating lease right-of-use assets | 36 | |
Intangible assets, net | 226 | |
| |
Other assets | 1 | |
Total assets | 386 | |
| |
Accounts payable | 29 | |
Contract liabilities | 2 | |
Accrued salaries, wages and benefits | 39 | |
Operating lease liabilities | 6 | |
| |
Total current liabilities | 76 | |
| |
Deferred income taxes | 19 | |
Operating lease liabilities | 30 | |
Other liabilities | 7 | |
Total liabilities | 132 | |
| |
Net assets acquired | 254 | |
Goodwill | $ | 576 | |
The goodwill recognized of $576 million arising from this acquisition primarily related to future growth opportunities based on an expanded service offering from intellectual capital and a highly skilled assembled workforce and other expected synergies from the combined operations. For U.S. tax purposes, the transaction is treated as a stock deal. As a result, there is no step-up in "Acquisitiontax basis and integrationthe goodwill recognized is not deductible for tax purposes.
The following table summarizes the fair value of intangible assets and the related costs" onweighted-average useful lives:
| | | | | | | | | | | |
Dollars in millions | Fair Value | | Weighted Average Amortization Period (in years) |
Funded backlog | $ | 28 | | | 1 |
Customer relationships | 198 | | | 15 |
Total intangible assets | $ | 226 | | | 13 |
The backlog intangible asset is comprised solely of funded backlog that represents revenue that is already fully awarded and funded as of the acquisition date.The customer relationships intangible assets consists of unfunded backlog as of the acquisition date and revenue arising from existing, recompete and follow-on programs. The funded backlog and customer relationships intangible assets were valued using the income approach, specifically the multi-period excess earnings method in which the value is derived from an estimation of the after-tax cash flows specifically attributable to funded backlog and customer relationships. The analysis included assumptions for forecasted revenues and EBITDA margins, contributory asset charge rates, weighted average cost of capital and a tax amortization benefit.
Scientific Management Associates (Operations) Pty Ltd
On March 6, 2020, we acquired certain assets and assumed certain liabilities related to the government defense business of Scientific Management Associates (Operations) Pty Ltd ("SMA"). The acquired business of SMA provides technical training services to the Royal Australian Navy and is reported within our consolidated statements of operations. NaN acquisition-related costs were recordedGS business segment. We accounted for this transaction using the acquisition method under ASC 805, Business Combinations. The agreed-upon purchase price for the year ended December 31, 2019.acquisition was $13 million, less purchase price adjustments totaling $4 million resulting in net cash consideration paid of $9 million. We recognized goodwill of $12 million arising from the acquisition, which relates primarily to future growth opportunities to expand services provided to the Royal Australian Navy. During the first quarter of 2021, contingent consideration liability that was recorded at the time of acquisition was settled for $1 million.
Supplemental Pro Forma Information
The following unaudited supplemental pro forma results of operations of the subcontracting entities have been included in our consolidated statements of operations for periods subsequent to assuming control on January 15, 2018. The acquired subcontracting entities contributed $535 million and $533 million of revenues and $71 million and $61 million of gross profit during the years ended December 31, 2019 and 2018, respectively.
The following supplemental pro forma condensed consolidated results of operations assume that SGT and the Aspire Defence subcontracting entities had been acquired as of January 1, 2017. The supplemental pro forma information was prepared based on thefrom historical financial information of SGT and the Aspire Defence subcontracting entities and hasstatements that have been adjusted to give effect to pro forma adjustments that are both directly attributable to the transactionacquisition of Frazer-Nash and factually supportable.Centauri as though they had been acquired on January 1, 2020 and January 1, 2019, respectively. Pro forma adjustments were primarily related to the amortization of intangibles, interest on borrowings related to the acquisitions, significant nonrecurring transactions and the reclassification of the gain on consolidation of the Aspire entities to January 1, 2017.acquisition related transaction costs. Accordingly, this supplemental pro forma financial information is presented for informational purposes only and is not necessarily indicative of what the actual results of operations of the combined company would have been had the acquisitions occurred on January 1, 2017,2020 and January 1, 2019, nor is it indicative of future results of operations.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
Dollars in millions | 2021 | | 2020 | | 2019 |
| (Unaudited) |
Revenue | $ | 7,465 | | | $ | 6,317 | | | $ | 6,137 | |
Net income attributable to KBR | $ | 28 | | | $ | (64) | | | $ | 172 | |
Diluted earnings per share | $ | 0.19 | | | $ | (0.45) | | | $ | 1.20 | |
|
| | | | | | | |
| Year ended December 31, |
Dollars in millions | 2018 | | 2017 |
| (Unaudited) |
Revenue | $ | 5,060 |
| | $ | 5,057 |
|
Net income attributable to KBR | 367 |
| | 342 |
|
Diluted earnings per share | $ | 2.59 |
| | $ | 2.41 |
|
Note 5. 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 and the Aspire project cash balances are limited to specific project 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 entities. We expect to use this cash for project costs and distributions of earnings.
The components of our cash and equivalents balance are as follows:
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
Dollars in millions | International (a) | | Domestic (b) | | Total |
Operating cash and equivalents | $ | 218 | | | $ | 34 | | | $ | 252 | |
Short-term investments (c) | 2 | | | — | | | 2 | |
Cash and equivalents held in consolidated joint ventures and Aspire Defence subcontracting entities | 116 | | | — | | | 116 | |
Total | $ | 336 | | | $ | 34 | | | $ | 370 | |
|
| | | | | | | | | | | |
| December 31, 2019 |
Dollars in millions | International (a) | | Domestic (b) | | Total |
Operating cash and equivalents | $ | 187 |
| | $ | 114 |
| | $ | 301 |
|
Short-term investments (c) | 58 |
| | 93 |
| | 151 |
|
Cash and equivalents held in consolidated joint ventures and Aspire Defence subcontracting entities | 259 |
| | 1 |
| | 260 |
|
Total | $ | 504 |
| | $ | 208 |
| | $ | 712 |
|
|
| | | | | | | | | | | |
| December 31, 2018 |
Dollars in millions | International (a) | | Domestic (b) | | Total |
Operating cash and equivalents | $ | 123 |
| | $ | 104 |
| | $ | 227 |
|
Short-term investments (c) | 87 |
| | 107 |
| | 194 |
|
Cash and equivalents held in consolidated joint ventures and Aspire Defence subcontracting entities | 315 |
| | 3 |
| | 318 |
|
Total | $ | 525 |
| | $ | 214 |
| | $ | 739 |
|
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
Dollars in millions | International (a) | | Domestic (b) | | Total |
Operating cash and equivalents | $ | 228 | | | $ | 54 | | | $ | 282 | |
Short-term investments (c) | 3 | | | — | | | 3 | |
Cash and equivalents held in consolidated joint ventures and Aspire Defence subcontracting entities | 151 | | | — | | | 151 | |
Total | $ | 382 | | | $ | 54 | | | $ | 436 | |
| |
(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. |
(a)Includes deposits held by non-U.S. entities with operating accounts that constitute offshore cash for tax purposes.
(b)Includes U.S. dollar and foreign currency deposits held in U.S. entities with operating accounts that constitute onshore cash for tax purposes but may reside either in the U.S. or in a foreign country. Note 6. Accounts Receivable(c)Includes time deposits, money market funds and other highly liquid short-term investments.
The components of our accounts receivable, net of allowance for doubtful accounts, are as follows:
|
| | | | | | | | | | | |
| December 31, 2019 |
Dollars in millions | Unbilled | | Trade & Other | | Total |
Government Solutions | $ | 184 |
| | $ | 381 |
| | $ | 565 |
|
Technology Solutions | 6 |
| | 56 |
| | 62 |
|
Energy Solutions | 118 |
| | 192 |
| | 310 |
|
Subtotal | 308 |
| | 629 |
| | 937 |
|
Non-strategic Business | — |
| | 1 |
| | 1 |
|
Total | $ | 308 |
| | $ | 630 |
| | $ | 938 |
|
|
| | | | | | | | | | | |
| December 31, 2018 |
Dollars in millions | Unbilled | | Trade & Other | | Total |
Government Solutions | $ | 266 |
| | $ | 334 |
| | $ | 600 |
|
Technology Solutions | 11 |
| | 62 |
| | 73 |
|
Energy Solutions | 69 |
| | 185 |
| | 254 |
|
Subtotal | 346 |
| | 581 |
| | 927 |
|
Non-strategic Business | — |
| | — |
| | — |
|
Total | $ | 346 |
| | $ | 581 |
| | $ | 927 |
|
Note 7. Contract Assets and Contract Liabilities
Our contract assets by business segment are as follows:
|
| | | | | | | |
| December 31, |
Dollars in millions | 2019 | | 2018 |
Government Solutions | $ | 111 |
| | $ | 123 |
|
Technology Solutions | 36 |
| | 19 |
|
Energy Solutions | 68 |
| | 43 |
|
Subtotal | 215 |
| | 185 |
|
Non-strategic Business | — |
| | — |
|
Total | $ | 215 |
| | $ | 185 |
|
Our contract liabilities balances by business segment are as follows:
|
| | | | | | | |
| December 31, |
Dollars in millions | 2019 | | 2018 |
Government Solutions | $ | 261 |
| | $ | 261 |
|
Technology Solutions | 73 |
| | 98 |
|
Energy Solutions | 147 |
| | 100 |
|
Subtotal | 481 |
| | 459 |
|
Non-strategic Business | 3 |
| | 4 |
|
Total | $ | 484 |
| | $ | 463 |
|
We recognized revenue of $211 million for the year ended December 31, 2019, that was previously included in the contract liability balance at December 31, 2018.
Note 8.6. Unapproved Change Orders and Claims Against Clients and Estimated Recoveries of Claims Against Suppliers and Subcontractors
The amounts of unapproved change orders and claims against clients and estimated recoveries of claims against suppliers and subcontractors included in determining the profit or loss on contracts are as follows:
|
| | | | | | | |
Dollars in millions | 2019 | | 2018 |
Amounts included in project estimates-at-completion at January 1, | $ | 973 |
| | $ | 924 |
|
Increase, net of foreign currency effect | 12 |
| | 53 |
|
Approved change orders, net of foreign currency effect | (7 | ) | | (4 | ) |
Amounts included in project estimates-at-completion at December 31, | $ | 978 |
| | $ | 973 |
|
Amounts recognized over time based on progress at December 31, | $ | 974 |
| | $ | 945 |
|
As of December 31, 2019 and 2018, the predominant component of change orders, customer claims and estimated recoveries of claims against suppliers and subcontractors above relates to our 30% proportionate share of unapproved change orders and claims associated with the Ichthys LNG Project discussed below.
| | | | | | | | | | | |
Dollars in millions | 2021 | | 2020 |
Amounts included in project estimates-at-completion at January 1, | $ | 1,048 | | | $ | 978 | |
(Decrease) increase in project estimates | (228) | | | (1) | |
Approved change orders | (374) | | | (6) | |
Foreign currency impact | (20) | | | 77 | |
| | | |
Amounts included in project estimates-at-completion at December 31, | $ | 426 | | | $ | 1,048 | |
Amounts recognized over time based on progress at December 31, | $ | 426 | | | $ | 1,048 | |
KBR intends to vigorously pursueand its joint ventures have been pursuing approval and collection of amounts still due under major unapproved client change orders and claims, against the clients and recoveries from subcontractors. Further, there are additional claims that KBR believes it is entitled to recover from its client and from subcontractors which have been excluded from estimated revenues and profits at completion as appropriate under U.S. GAAP. Thesesubcontractor claims. The remaining commercial matters may not be resolved in the near term. Our current estimates for approval and recoveries may differ materially from the above unapproved change orders, client claimsamounts we have recorded and estimated recoveries of claims against suppliers and subcontractors may prove inaccurate and any material change could have a material adverse effect on our results of operations, financial position and cash flows.
As of December 31, 2021 and 2020, the majority of unapproved change orders and claims against client and estimated recoveries of claims against suppliers and subcontractors relates to the Ichthys LNG Project discussed below.
Ichthys LNG Project
Project Status
We have a 30% ownership interest in the JKC joint venture ("JKC"), which haswas contracted to perform the engineering, procurement, supply, construction and commissioning of onshore LNG facilities for a client in Darwin, Australia (the "Ichthys LNG Project"). The contract between JKC and its client is a hybrid contract containing both cost-reimbursable and fixed-price (including unit-rate) scopes.
The construction and commissioning of the Ichthys LNG Project is complete, and all performance tests have been successfully performed. The entire facility, including two LNG liquefaction trains, cryogenic tanks and the combined cycle power generation facility has been handed over to the client and is producing LNG. JKC is in the process of executing project close-out activities and continues to negotiate the various legal and commercial disputes
Settlement Agreement with the Client
In October 2021, JKC entered into a binding settlement agreement (the “Settlement Agreement”) that resolved the outstanding claims and disputes between JKC and its client, suppliersIchthys LNG Pty, Ltd (collectively, “the Parties”). As a result of
the Settlement Agreement, the Parties agreed to withdraw all claims and other third parties as further described below.terminate all ongoing arbitrations and court proceedings between the Parties, including the following:
Unapproved Change Orders and Claims Against Client
•Under the cost-reimbursable scope of the contract, with the client, JKC has entered into commercial contracts with multiple suppliers and subcontractors to execute various scopes of work on the project. Certain of these suppliers and subcontractors have made contract claims against JKC for recovery of costs and extensions of time to progress the works under the scope of their respective contracts due to a variety of issues related to alleged changes to the scope of work, delays and lower than planned subcontractor productivity. In addition, JKC has incurred costs related to scope increases and other factors, and has made claims to its client for matters for which JKC believes it is entitled to reimbursement under the contract.
JKC believes anybelieved amounts paid or payable to the suppliers and subcontractors in settlement of their contract claims related to the cost-reimbursable scope arewere an adjustment to the contract price, and accordinglyprice. JKC has made claims for such contract price adjustments under the cost-reimbursable scope of the contract between JKC and its client. However,adjustments; however, the client disputed some of these contract price adjustments and subsequently withheld certain payments.adjustments. In order to facilitate the continuation of work, under the contract while JKC worked to resolve this dispute, the client agreed to a contractual mechanism (“Funding Deed”) in 2016 providing funding in the form of an interim contract price adjustment to JKC, and consented to settlement of subcontractor claims as of that date related to the cost-reimbursable scope. While the client hasscope, but reserved its contractual rights under this funding mechanism, settlement funds (representing the interim contract price adjustment) have been paid by the client. JKC in turn settled these subcontractor claims which have been funded through the Funding Deed by the client.
If JKC's claims against its client which were funded under the Funding Deed remain unresolved by December 31, 2020, JKC will be requiredright to refund sums funded by the client under the terms of the Funding Deed. We, along with our joint venture partners, are jointly and severally liable to the client for any amounts required to be refunded.
Our proportionate share of the total amount of the contract price adjustments under the Funding Deed included in the unapproved change orders and claims related to JKC discussed above is $158 million and $159 million as of December 31, 2019 and 2018, respectively. The difference in these values is due to exchange rate fluctuations.
dispute. In September and October 2017, additional settlements pertaining to suppliers and subcontractors under the cost-reimbursable scope of the contract were presented to the client. Theclient, and the client consented to these settlements and paid for thempayment to JKC but reserved its contractual rights. In reliance, The Settlement Agreement fully resolved these matters capping JKC's recovery to amounts previously funded by the client.
•JKC in turn settled these claims withwas entitled to an amount of profit and overhead which was a fixed percentage of the associated suppliers and subcontractors. The formal contract price adjustments for these settlements remained pending at December 31, 2019. However, unlike amounts fundedtarget reimbursable costs under the Funding Deed, therereimbursable component of the contract. The Parties were unable to reach agreement on incremental amounts claimed by JKC. The Settlement Agreement fully resolved this matter.
•Claims for incurred costs related to scope increases and other factors for which JKC believed it is no requiremententitled to refund these amounts toreimbursement under the clientcontract along with claims asserted by a certain date.the client.
In October 2018, JKC receivedconnection with preliminary settlement discussions, the Company recorded a favorable ruling from an arbitration tribunal relatednon-cash charge to equity in earnings of unconsolidated affiliates in the Funding Deeds. The ruling determined a contract interpretationamount of $193 million in JKC's favor, to the effect that delay and disruption costs payable to subcontractors under the cost-reimbursable scopequarter ended June 30, 2021, which reflected KBR’s proportionate share of the EPC contract are for the client's account and are reimbursable to JKC. JKC contends this ruling resolves the reimbursability of the subcontractor settlement sums under the Funding Deed and additional settlements made in September and October 2017. Pursuant to this decision, JKC has undertaken steps for a formal contract adjustment to the cost-reimbursable scope of the contract for these settlement claims which are included in the recognizedunpaid, unapproved change orders asand claims. In the quarter ended September 30, 2021, KBR recorded an additional charge of December 31, 2019. Our view is thatapproximately $10 million for its proportionate share of final warranty items.
As part of the arbitration ruling resolves our obligations under the Funding Deeds and settlements with reimbursable subcontractors. However, the clientSettlement Agreement, KBR’s letters of credit were also reduced to $82 million from $164 million.
The Settlement Agreement does not agreeimpact pursuit of, or positions related to, JKC’s subcontractor claims associated with the impact of the arbitration awardcombined cycle power plant described below.
Paint and accordingly, we have initiated a new proceeding to obtain further determination from the arbitration tribunal.Insulation Claims Against Insurer and Paint Manufacturer
There has been deterioration of paint and insulation on certain exterior areas of the plant. The client previously requested and funded paint remediation for a portionAs part of the facilities. JKC’s profit estimate at completion includes a portion of revenuesSettlement Agreement, the Parties agreed to consult in good faith and coststo cooperate to seek maximum recovery from the insurance policies and paint manufacturer for these remediation activities. Revenue for the client-funded amounts are included in the table above. In the first quarter of 2019, the client demanded repayment of the amounts previously funded to JKC. JKC is disputing the client's demand. The client has also requested a proposal to remediate any remaining non-conforming paint and insulation but JKC and its client have not resolved the nature and extent of the non-conformances, the method and degree of remediation that was and is required, or who is responsible. We believe the remaining remediation costs could be material given the plant is now operating and there will be several operating constraints on any such works.
In addition, JKC has started proceedingsmatters. The Parties agreed to collectively pursue claims against the paint manufacturer, and initiated claims against the subcontractors. JKC has also made demands onassigned claims under the insurance policies in respectpolicy regarding the paint and insulation matters to the client.
Under the Settlement Agreement, the parties have agreed that if, at the date of these matters. Proceedingsfinal resolution of the above proceedings and claims againstwith respect to the paint and insulation matters, the recovered amount from the paint manufacturer certain subcontractors and insurance policies are ongoing.claim is less than the stipulated ceiling amount in the Settlement Agreement, JKC will pay the client the difference between the stipulated ceiling amount and the recovered amount. JKC has provided for and continues to maintain its contingent liability.
Combined Cycle Power Plant
Pursuant to JKC's fixed-price scope of its contract with its client, JKC awarded a fixed-price EPC contract to a subcontractor for the design, construction and commissioning of the Combined Cycle Power Plant (the "Power Plant"). The subcontractor was a consortium consisting of General Electric and GE Electrical International Inc. and a joint venture between UGL Infrastructure Pty Limited and CH2M Hill (collectively, the "Consortium"). On January 25, 2017, JKC received a Notice of Termination from the Consortium, and the Consortium ceased work on the Power Plant and abandoned the construction site. JKC believes the Consortium materially breached its subcontract and repudiated its obligation to complete the Power Plant, plus undertook actions making it more difficult and more costly for the works to be completed by others after the Consortium abandoned the site. Subsequently, the Consortium filed a request for arbitration with the ICC asserting that JKC repudiated the contract. The Consortium also sought an order that the Consortium validly terminated the subcontract. JKC has responded to this request, denying JKC committed any breach of its subcontract with the Consortium and restated its claim that the Consortium breached and repudiated its subcontract with JKC and is furthermore liable to JKC for all costs to complete the Power Plant.
In March 2017, JKC prevailed in a legal action against the Consortium requiring the return of materials, drawings and tools following their unauthorized removal from the site by the Consortium. After taking over the work, JKC discovered incomplete and defective engineering designs, defective workmanship on the site, missing, underreported and defective
materials and the improper termination of key vendors/suppliers. JKC's investigations also indicate that progress of the work claimed by the Consortium was over-reported. JKC has evaluated the cost to completecompleted the Consortium's work whichand the incurred costs significantly exceedsexceed the awarded fixed-price subcontract value. JKC's cost to complete the Power Plant includes re-design efforts, additional materials and significant re-work. These costs represent estimated recoveries of claims against the Consortium and have been included in JKC's estimate to complete the Consortium's remaining obligations.
JKC is pursuing recourse against the Consortium to recover all of the costs to complete the Power Plant, plus the additional interest, and/or general damages by all means inclusive of calling bank guarantees provided by the Consortium partners. In April 2018, JKC prevailed in a legal action to call bank guarantees (bonds) and received funds totaling $52 million.damages. Each of the Consortium partners has joint and several liability with respect to all obligations under the subcontract. JKC intends to pursue recovery of all additional amounts due from the Consortium via various legal remedies available to JKC.
Costs incurred to complete the Power Plant that have been determined to be probable of recovery from the Consortium under U.S. GAAP have been included as a reduction of cost in our estimate of profit at completion. The estimated recoveries exclude interest, liquidated damages and other related costs which JKC intends to pursue recovery from the Consortium. Amounts expected to be recovered from the Consortium are included in the table above.above at the beginning of this Note 6.
As of December 31, 2019,2021, JKC's claims against the Consortium were approximately $1.9$1.6 billion (net of subcontractor bonds and remaining original lump sum subcontract value) for recovery of JKC's costs. Hearings onThe opening hearing of the power plant arbitration will take placewas held in April 2021. The final hearing is expected to be held in April and May 2022. The previous hearing dates were vacated due to the COVID-19 delay and August of 2020 (the "Arbitration"). the current dates may continue to be impacted by the COVID-19 pandemic.
JKC also initiated suit againstasked the Australian courts to require the parent companiescompany guarantors of the Consortium members to seek a declaration that the parents either hadissue payment to perform and finish the work or pay forJKC in advance of the completion of the power plant based on their payment and performance guarantees. In May 2019,arbitration proceedings. The court concluded that the court ruled against the declaration and JKC's appeal is pendingparent companies are responsible for Consortium’s liability resulting from the court.arbitration outcome, but they are not required to pay in advance of the arbitration. JKC continues to pursue the resolution of this matter and will seek collection from the Consortium and their parent guarantors who are all jointly and severally liable for any damages owed to JKC.
To the extent JKC is unsuccessful in prevailing in the Arbitration or the Consortium members are unable to satisfy their financial obligations in the event of a decision favorable to JKC, we would be responsible for our pro-rata portion of unrecovered costs from the Consortium. This could have a material adverse impact on the profit at completion of the overall contract and thus on our consolidated statements of operations and financial position.
Ichthys Project Funding
As a result of the ongoing disputes with the client and pursuit of recoveries against the Consortium through the Arbitration, we have funded our proportionate share of the working capital requirements of JKC to complete the project. As of December 31, 2019, we have made investment contributions to JKC of approximately $484 million on an inception-to-date basis.
If we experience unfavorable outcomes associated with the various legal and commercial disputes, our total investment contributions could increase which could have a material adverse effect on our financial position and cash flows. Further, if our joint venture partner(s) in JKC do not fulfill their responsibilities under the JKC JV agreement or subcontract, we could be exposed to additional funding requirements as a result of the nature of the JKC JV agreement.
As of December 31, 2019, we had $164 million in letters of credit outstanding in support of performance and warranty guarantees provided to the client. The performance and warranty letters of credit have been extended to February 2021 to allow for the various disputes to be resolved.
Other Matters
JKC is entitled to an amount of profit and overhead (“TRC Fee”) which is a fixed percentage of the target reimbursable costs ("TRC") under the reimbursable component of the contract which was to be agreed by JKC and its client. At the time of the contract, JKC and its client agreed to postpone the fixing of the TRC until after a specific milestone in the project had been achieved. Although the milestone was achieved, JKC and its client have been unable to reach agreement on the TRC. This matter was taken to arbitration in 2017. A decision was issued in December 2017 concluding that the TRC should be determined based on project estimate information available at April 2014. JKC has included an estimate for the TRC Fee in its determination of profit at completion at December 31, 2019, based on the contract provisions and the decision from the December 2017 arbitration. JKC has submitted the revised estimate of the TRC Fee to the client. The parties have not agreed to the revised estimate, and JKC has started an additional arbitration on this dispute.
In late 2019, the International Chamber of Commerce consolidated the Funding Deed arbitration, TRC arbitration and certain other claims asserted by JKC along with claims asserted by its client. The client will file a detailed statement of its claim in December 2020. The arbitration panel has been constituted but a hearing date has not been scheduled. A hearing date for the Funding Deed arbitration has been schedule for September 2020.
All of the Ichthys LNG project commercial matters are complex and involve multiple interests, including the client, suppliers and other third parties. Ultimate resolution may not occur in the near term. Our current estimates for resolving these matters may prove inaccurate and, if so, any material change could have a material adverse effect on our results of operations, financial position and cash flows.
See Note 1210 "Equity Method Investments and Variable Interest Entities" to our consolidated financial statements for further discussion regarding our equity method investment in JKC.
Changes in all other 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,
weather, and ongoing resolution of legacy projects and legal matters. We generally 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.
During year ended December 31, 2021 within our STS business segment, we recognized a non-cash charge to equity in earnings of unconsolidated affiliates of $193 million as a result of changes in estimates on the Ichthys LNG project during the second quarter of 2021 and an additional $10 million charge for final warranty items during the third quarter of 2021. Additionally, during the year ended December 31, 2021, we recognized a favorable change of $37 million in gross profit associated with the settlement of a legacy EPC project matter, partially offset by $20 million related to the resolution of other legacy matters.
During year ended December 31, 2020, we recognized a favorable change of $16 million in estimated revenues and gross profit associated with variable consideration resulting from resolution of a contingency of a legacy EPC project during the first quarter of 2020.
Note 9. Claims7. Restructuring Charges and Accounts ReceivableAsset Impairments
Our claimsDuring 2020, our management initiated and accounts receivable balance not expectedapproved a broad restructuring plan in response to be collected within the next 12 monthsdislocation of the global energy market resulting from the decline in oil prices and the COVID-19 pandemic. As part of the plan, management approved strategic business restructuring activities and decided to discontinue pursuing certain projects, principally lump-sum EPC and commoditized construction services. The restructuring plan was designed to refine our market focus, optimize costs and improve operational efficiencies. The restructuring charges were substantially completed in the year ended December 31, 2020.
We recorded restructuring charges and asset impairments of $2 million for the year ended December 31, 2021. For the year ended December 31, 2020, we recorded restructuring charges and asset impairments as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dollars in millions | Severance | | Lease Abandonment | | Other | | Total Restructuring Charges | | Asset Impairments | | Total Restructuring Charges & Asset Impairments |
Government Solutions | $ | 2 | | | $ | — | | | $ | — | | | $ | 2 | | | $ | 2 | | | $ | 4 | |
Sustainable Technology Solutions | 29 | | | 4 | | | 6 | | | 39 | | | 47 | | | 86 | |
Other | 1 | | | 54 | | | 20 | | | 75 | | | 49 | | | 124 | |
Total | $ | 32 | | | $ | 58 | | | $ | 26 | | | $ | 116 | | | $ | 98 | | | $ | 214 | |
The restructuring liability at December 31, 2021 was $66 million, of which $17 million is included in other current liabilities and $49 million is included in other liabilities. A reconciliation of the beginning and ending restructuring liability balances is provided in the following table.
| | | | | | | | | | | | | | | | | | | | | | | |
Dollars in millions | Severance | | Lease Abandonment | | Other | | Total |
Balance at January 1, 2021 | $ | 15 | | | $ | 52 | | | $ | 24 | | | $ | 91 | |
| | | | | | | |
Lease restructuring charges related to operating lease liabilities | — | | | 2 | | | — | | | 2 | |
Cash payments / settlements during the period | (9) | | | (7) | | | (5) | | | (21) | |
Currency translation and other adjustments | (3) | | | — | | | (3) | | | (6) | |
Balance at December 31, 2021 | $ | 3 | | | $ | 47 | | | $ | 16 | | | $ | 66 | |
The restructuring liability at December 31, 2020 was $91 million, of which $32 million is included in other current liabilities and $59 million is included in other liabilities. A reconciliation of the beginning and $98ending restructuring liability balances is provided in the following table.
| | | | | | | | | | | | | | | | | | | | | | | |
Dollars in millions | Severance | | Lease Abandonment | | Other | | Total |
Balance at January 1, 2020 | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Restructuring charges accrued during the period | 32 | | | 58 | | | 26 | | | $ | 116 | |
Lease restructuring charges related to operating lease liabilities | — | | | (4) | | | — | | | $ | (4) | |
Cash payments / settlements during the period | (16) | | | (2) | | | (3) | | | $ | (21) | |
Currency translation and other adjustments | $ | (1) | | | $ | — | | | $ | 1 | | | $ | — | |
Balance at December 31, 2020 | $ | 15 | | | $ | 52 | | | $ | 24 | | | $ | 91 | |
| | | | | | | |
Note 8. Property, Plant and Equipment
The components of our property, plant and equipment balance are as follows:
| | | | | | | | | | | | | | | | | |
| Estimated Useful Lives in Years | | December 31, |
Dollars in millions | | 2021 | | 2020 |
Land | N/A | | $ | 5 | | | $ | 5 | |
Buildings and property improvements | 1-35 | | 131 | | | 129 | |
Equipment and other | 1-25 | | 431 | | | 415 | |
Total | | | 567 | | | 549 | |
Less accumulated depreciation | | | (431) | | | (419) | |
Net property, plant and equipment | | | $ | 136 | | | $ | 130 | |
Property, plant and equipment includes approximately $39 million and $36 million of equipment and other assets under finance lease obligations as of December 31, 20192021, and 2018,2020, respectively. Claims and accounts receivable primarily reflect claims filed with the U.S. government related to payments not yet receivedDepreciation expense, including amortization expense for costs incurred under various U.S. government cost-reimbursable contracts within our GS business segment. These claims relate to disputed costs or contracts where our costs have exceeded the U.S. government's funded value on the task order. Included in these amounts is $28finance ROU assets, was $42 million, $36 million and $73$33 million as offor the years ended December 31, 2021, 2020 and 2019, and 2018, respectively, related to Form 1s issued by the U.S. government questioning or objecting to costs billed to them. See Note 16 of our consolidated financial statements for additional information. The amount also includes $31 million and $25 million as of December 31, 2019 and 2018, respectively, related to contracts where our reimbursable costs have exceeded the U.S. government's funded values on the underlying task orders or task orders where the U.S. government has not authorized us to bill. We believe the remaining disputed costs will be resolved in our favor, at which time the U.S. government will be required to obligate funds from appropriations for the year in which resolutions occur.respectively.
Note 10. Property, Plant and Equipment
The components of our property, plant and equipment balance are as follows:
|
| | | | | | | | | |
| Estimated Useful Lives in Years | | December 31, |
Dollars in millions | | 2019 | | 2018 |
Land | N/A | | $ | 5 |
| | $ | 5 |
|
Buildings and property improvements | 1-35 | | 124 |
| | 122 |
|
Equipment and other | 1-25 | | 387 |
| | 349 |
|
Total | | | 516 |
| | 476 |
|
Less accumulated depreciation | | | (386 | ) | | (355 | ) |
Net property, plant and equipment | | | $ | 130 |
| | $ | 121 |
|
Depreciation expense was $33 million, $31 million, and $27 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Note 11.9. Goodwill and Intangible Assets
Goodwill
The table below summarizes changes in the carrying amount of goodwill byin each of the Company’s reportable segments for the years ended December 31, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | |
Dollars in millions | Government Solutions | | Sustainable Technology Solutions | | Total |
| | | | | |
| | | | | |
| | | | | |
Balance as of January 1, 2020 | $ | 978 | | | $ | 287 | | | $ | 1,265 | |
Goodwill acquired during the period (Note 4) | 589 | | | — | | | 589 | |
| | | | | |
Goodwill reallocation | 19 | | | (19) | | | — | |
Impairment loss | — | | | (99) | | | (99) | |
Foreign currency translation | 3 | | | 3 | | | 6 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Balance as of January 1, 2021 | $ | 1,589 | | | $ | 172 | | | $ | 1,761 | |
Goodwill acquired during the period (Note 4) | 306 | | | — | | | 306 | |
| | | | | |
| | | | | |
| | | | | |
Foreign currency translation | (5) | | | (2) | | | (7) | |
Balance as of December 31, 2021 | $ | 1,890 | | | $ | 170 | | | $ | 2,060 | |
2020 Goodwill Impairment
In connection with our business reorganization and restructuring activities during the first quarter of 2020, we changed our internal management reporting structure, which resulted in changes to the underlying reporting units within our legacy Energy Solutions business segment. Additionally, given the significant adverse economic and market conditions associated with the dislocation of the global energy market and COVID-19 pandemic as well as the significant decline in the price of our common shares during the first quarter of 2020, we performed an interim impairment test of goodwill resulting in goodwill impairment of $62 million for the three months ended March 31, 2020. The goodwill impairment was associated with a reporting unit in our legacy Energy Solutions business segment.
|
| | | | | | | | | | | | | | | |
Dollars in millions | Government Solutions | | Technology Solutions | | Energy Solutions | | Total |
Balance as of January 1, 2018 | $ | 679 |
| | $ | 51 |
| | $ | 238 |
| | $ | 968 |
|
Goodwill acquired during the period | 299 |
| | — |
| | — |
| | 299 |
|
Purchase price adjustment | 2 |
| | — |
| | — |
| | 2 |
|
Foreign currency translation | (3 | ) | | — |
| | (1 | ) | | (4 | ) |
Balance as of December 31, 2018 | $ | 977 |
| | $ | 51 |
| | $ | 237 |
| | $ | 1,265 |
|
Goodwill acquired during the period | $ | — |
| |
|
| | $ | — |
| | $ | — |
|
Purchase price adjustment | — |
| | — |
| | — |
| | — |
|
Foreign currency translation | 1 |
| | (1 | ) | | — |
| | — |
|
Balance as of December 31, 2019 | $ | 978 |
| | $ | 50 |
| | $ | 237 |
| | $ | 1,265 |
|
As a result of the ongoing economic and market volatility as well as management's decision to discontinue pursuing certain projects within our legacy Energy Solutions business segment during the second quarter of 2020, we performed an interim impairment test of goodwill resulting in goodwill impairment of $37 million for the three months ended June 30, 2020. The goodwill impairment was associated with a reporting unit within our STS business segment. One reporting unit within our GS business segment had a negative carrying amount of net assets as of June 30, 2020 and goodwill of approximately $19 million. No change in the composition of our reporting units resulted from our segment reorganization, effective January 1, 2021, and as such, no reallocation of goodwill was required.
For reporting units in our STS business segment, fair value was determined using a blended approach utilizing discounted cash flow models with estimated cash flows based on internal forecasts of revenues and expenses over a specified period plus a terminal value. For all other reporting units, fair values were determined using a blended approach including market earnings multiples and discounted cash flow models. Under the market approach, we estimated fair value by applying earnings and revenue market multiples to a reporting unit’s operating performance for the trailing twelve-month period. The income approach estimates fair value by discounting each reporting unit’s estimated future cash flows using a weighted-average cost of capital that reflects current market conditions and the risk profile of the reporting unit. To arrive at our future cash flows, we used estimates of economic and market assumptions, including growth rates in revenues, costs, estimates of future expected changes in operating margins, tax rates and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements.
Intangible Assets
Intangible assets are comprised of customer relationships, trade names, licensing agreements and other. The cost and accumulated amortization of our intangible assets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
Dollars in millions | December 31, 2021 |
| Weighted Average Remaining Useful Lives | | Intangible Assets, Gross | | Accumulated Amortization | | Intangible Assets, Net |
Trademarks/trade names | Indefinite | | $ | 50 | | | $ | — | | | $ | 50 | |
Customer relationships | 14 | | 546 | | | (124) | | | 422 | |
Developed technologies | 18 | | 75 | | | (39) | | | 36 | |
Contract backlog | 18 | | 303 | | | (113) | | | 190 | |
Other | 11 | | 25 | | | (15) | | | 10 | |
Total intangible assets | | | $ | 999 | | | $ | (291) | | | $ | 708 | |
| | | | | | | |
| December 31, 2020 |
| Weighted Average Remaining Useful Lives | | Intangible Assets, Gross | | Accumulated Amortization | | Intangible Assets, Net |
Trademarks/trade names | Indefinite | | $ | 50 | | | $ | — | | | $ | 50 | |
Customer relationships | 15 | | 470 | | | (100) | | | 370 | |
Developed technologies | 19 | | 75 | | | (37) | | | 38 | |
Contract backlog | 18 | | 291 | | | (76) | | | 215 | |
Other | 13 | | 25 | | | (15) | | | 10 | |
Total intangible assets | | | $ | 911 | | | $ | (228) | | | $ | 683 | |
|
| | | | | | | | | | | | | |
Dollars in millions | December 31, 2019 |
| Weighted Average Remaining Useful Lives | | Intangible Assets, Gross | | Accumulated Amortization | | Intangible Assets, Net |
Trademarks/trade names | Indefinite | | $ | 61 |
| | $ | — |
| | $ | 61 |
|
Customer relationships | 16 | | 271 |
| | (83 | ) | | 188 |
|
Developed technologies | 22 | | 68 |
| | (36 | ) | | 32 |
|
Contract backlog | 19 | | 255 |
| | (52 | ) | | 203 |
|
Other | 14 | | 24 |
| | (13 | ) | | 11 |
|
Total intangible assets | | | $ | 679 |
| | $ | (184 | ) | | $ | 495 |
|
| | | | | | | |
| December 31, 2018 |
| Weighted Average Remaining Useful Lives | | Intangible Assets, Gross | | Accumulated Amortization | | Intangible Assets, Net |
Trademarks/trade names | Indefinite | | $ | 61 |
| | $ | — |
| | $ | 61 |
|
Customer relationships | 17 | | 272 |
| | (69 | ) | | 203 |
|
Developed technologies | 22 | | 61 |
| | (34 | ) | | 27 |
|
Contract backlog | 20 | | 249 |
| | (36 | ) | | 213 |
|
Other | 14 | | 24 |
| | (12 | ) | | 12 |
|
Total intangible assets | | | $ | 667 |
| | $ | (151 | ) | | $ | 516 |
|
Intangibles subject to amortization are impaired if the carrying value of the intangible is not recoverable and exceeds its fair value. Intangibles that are not subject to amortization are reviewed annually for impairment or more often if events or circumstances change that would create a triggering event. Intangibles subject to amortization are impaired ifIn 2020, in connection with the carrying valueenergy market decline, we recognized an impairment loss on indefinite-lived intangible assets associated with certain trade names acquired through previous business combinations of the intangible is not recoverableour legacy ES business of approximately $11 million within restructuring charges and exceeds its fair value.asset impairments.
Our intangibles amortization expense is presented below:
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
Dollars in millions | 2021 | | 2020 | | 2019 |
Intangibles amortization expense | $ | 66 | | | $ | 42 | | | $ | 33 | |
|
| | | | | | | | | | | |
| Years ended December 31, |
Dollars in millions | 2019 | | 2018 | | 2017 |
Intangibles amortization expense | $ | 33 |
| | $ | 32 |
| | $ | 21 |
|
Our expected intangibles amortization expense for the next five years is presented below:
| | | | | |
Dollars in millions | Expected future intangibles amortization expense |
2022 | $ | 51 | |
2023 | $ | 43 | |
2024 | $ | 42 | |
2025 | $ | 42 | |
2026 | $ | 42 | |
Beyond 2026 | $ | 438 | |
|
| | | |
Dollars in millions | Expected future intangibles amortization expense |
2020 | $ | 32 |
|
2021 | $ | 28 |
|
2022 | $ | 23 |
|
2023 | $ | 23 |
|
2024 | $ | 23 |
|
Beyond 2024 | $ | 304 |
|
Note 10. Equity Method Investments and Variable Interest Entities
We conduct some of our operations through joint ventures, which operate through partnerships, corporations and undivided interests and other business forms and are principally accounted for using the equity method of accounting. Additionally, the majority of our joint ventures are VIEs.
The following table presents a rollforward of our equity in and advances to unconsolidated affiliates:
| | | | | | | | | | | |
Dollars in millions | 2021 | | 2020 |
Beginning balance at January 1, | $ | 881 | | | $ | 846 | |
| | | |
| | | |
Equity in earnings (losses) of unconsolidated affiliates | (170) | | | 30 | |
Distributions of earnings of unconsolidated affiliates (a) | (72) | | | (38) | |
Advances to (payments from) unconsolidated affiliates, net | (17) | | | (15) | |
Investments (b) | 29 | | | 26 | |
Impairment of equity method investments (c) | — | | | (19) | |
Sale of equity method investment (d) | (39) | | | — | |
Foreign currency translation adjustments | (10) | | | 50 | |
Other (e) | (26) | | | 1 | |
| | | |
| | | |
| | | |
Balance at December 31, | $ | 576 | | | $ | 881 | |
(a)The Brown & Root Industrial Services joint venture declared a distribution in the fourth quarter of 2021 that was not paid to KBR until January 2022.
(b)Investments include $26 million and $24 million in funding contributions to JKC for years ended December 31, 2021, and 2020, respectively.
(c)During the year ended December 31, 2020, as a result of the significant adverse economic and market conditions associated with the dislocation of the global energy market and COVID-19 pandemic, we recognized an impairment of $13 million related to our investment in a joint venture project located in the Middle East and a $6 million impairment related to other equity method investments.
(d)During the third quarter of 2021, we sold our investment interest in the Middle East Petroleum Corporation (EBIC Ammonia project). The carrying value of our investment was $39 million. We received $43 million in cash proceeds and recorded a gain of $4 million, of which $1 million was attributable to our non-controlling interests. Subsequent to the receipt of the cash proceeds, we distributed the non-controlling interests' proportionate share of $15 million.
(e)During year ended December 31, 2021, Other included unearned income related to the Ichthys LNG project, which was previously recorded outside of the equity method investment balance and will not be realized as a result of the settlement proceedings. See Note 6 "Unapproved Change Orders and Claims Against Clients and Estimated Recoveries of Claims Against Suppliers and Subcontractors" for additional information.
Equity Method Investments
Brown & Root Industrial Services Joint Venture.On September 30, 2015, we executed an agreement with Bernhard Capital Partners ("BCP"), a private equity firm, to establish the Brown & Root Industrial Services joint venture in North America. In connection with the formation of the joint venture, we contributed our Industrial Services Americas business and
received cash consideration of $48 million and a 50% interest in the joint venture. As a result of the transaction, we no longer had a controlling interest in this Industrial Services business and deconsolidated it effective September 30, 2015. The Brown & Root Industrial Services joint venture offers engineering, construction and reliability-driven maintenance services for the refinery, petrochemical, chemical, specialty chemicals and fertilizer markets. Our interest in this venture is accounted for using the equity method and we have determined that the Brown & Root Industrial Services joint venture is not a VIE. Results from this joint venture are included in our STS business segment.
Summarized financial information
Summarized financial information for all jointly owned operations including VIEs that are accounted for using the equity method of accounting is as follows:
Balance Sheet
| | | | | | | | | | | |
| December 31, |
Dollars in millions | 2021 | | 2020 |
Current assets | $ | 2,382 | | | $ | 3,216 | |
Noncurrent assets | 2,996 | | | 3,227 | |
Total assets | $ | 5,378 | | | $ | 6,443 | |
| | | |
Current liabilities | $ | 955 | | | $ | 1,018 | |
Noncurrent liabilities | 2,652 | | | 2,831 | |
Total liabilities | $ | 3,607 | | | $ | 3,849 | |
Statements of Operations
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
Dollars in millions | 2021 | | 2020 | | 2019 |
Revenues | $ | 1,294 | | | $ | 2,032 | | | $ | 2,592 | |
| | | | | |
Operating income | $ | (650) | | | $ | 54 | | | $ | 92 | |
Net income | $ | (698) | | | $ | 28 | | | $ | 48 | |
Unconsolidated Variable Interest Entities
For the VIEs in which we participate, our maximum exposure to loss consists of our equity investment in the VIE and any amounts owed to us for services we may have provided to the VIE, reduced by any unearned revenues on the project. Our maximum exposure to loss may also include our obligation to fund our proportionate share of any future losses incurred. Where our performance and financial obligations are joint and several to the client with our joint venture partners, we may be further exposed to losses above our ownership interest in the joint venture.
The following summarizes the total assets and total liabilities related to our unconsolidated VIEs in which we have a significant variable interest but are not the primary beneficiary.
| | | | | | | | | | | | | |
| December 31, 2021 |
Dollars in millions | Total Assets | | Total Liabilities | | |
Affinity joint venture (U.K. MFTS project) | $ | 10 | | | $ | 7 | | | |
Aspire Defence Limited | $ | 65 | | | $ | 5 | | | |
JKC joint venture (Ichthys LNG project) | $ | 354 | | | $ | 1 | | | |
U.K. Road project joint ventures | $ | 42 | | | $ | — | | | |
Middle East Petroleum Corporation (EBIC Ammonia project) | $ | — | | | $ | — | | | |
| | | | | | | | | | | | | |
Dollars in millions | December 31, 2020 |
Total Assets | | Total Liabilities | | |
Affinity joint venture (U.K. MFTS project) | $ | 11 | | | $ | 9 | | | |
Aspire Defence Limited | $ | 68 | | | $ | 5 | | | |
JKC joint venture (Ichthys LNG project) | $ | 606 | | | $ | 44 | | | |
U.K. Road project joint ventures | $ | 59 | | | $ | — | | | |
Middle East Petroleum Corporation (EBIC Ammonia project) | $ | 31 | | | $ | 1 | | | |
Affinity. In February 2016, Affinity, a joint venture between KBR and Elbit Systems, 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. 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. The remaining 50% interest in these entities is held by Elbit Systems. KBR has provided its proportionate share of certain limited financial and performance guarantees in support of the partners' contractual obligations. The three project-related entities are VIEs; however, KBR is not the primary beneficiary of any of these entities. We account for KBR's interests in each entity using the equity method of accounting within our GS business segment. The project is funded through KBR and Elbit Systems provided equity, subordinated debt and non-recourse third party commercial bank debt. Our maximum exposure to loss includes our equity investments in the project entities as of December 31, 2021.
Aspire Defence project. In April 2006, Aspire Defence Limited, a joint venture between KBR and two other project sponsors, was awarded a privately financed project contract by the U.K. MoD to upgrade and provide a range of services to the British Army’s garrisons at Aldershot and around Salisbury Plain in the U.K. In addition to a package of ongoing services to be delivered over 35 years, the project included a nine-year construction program to improve soldiers’ single living, technical and administrative accommodations, along with leisure and recreational facilities. The initial construction program was completed in 2014. In late 2016, Aspire Defence Limited was awarded a significant contract variation, expanding services to be provided under the existing contract including new construction, program management services and facilities maintenance across the garrisons. Aspire Defence Limited manages the existing properties and is responsible for design, refurbishment, construction and integration of new and modernized facilities. We indirectly own a 45% interest in Aspire Defence Limited, the contracting company that is the holder of the 35-year concession contract. The project is funded through equity and subordinated debt provided by the project sponsors and the issuance of publicly-held senior bonds which are nonrecourse to KBR and the other project sponsors. The contracting company is a VIE; however, we are not the primary beneficiary of this entity as of December 31, 2018. We account for our interest in Aspire Defence Limited using the equity method of accounting. As of December 31, 2021, included in our GS segment, our assets and liabilities associated with our investment in this project, within our consolidated balance sheets, were $65 million and $5 million, respectively. Our maximum exposure to loss includes our equity investments in the project entities and amounts payable to us for services provided to these entities as of December 31, 2021.
Prior to January 15, 2018, we also owned a 50% interest in the joint ventures that provide the construction and the related support services under subcontract arrangements with Aspire Defence Limited. On January 15, 2018, Carillion plc, our U.K. partner in these joint ventures, entered into compulsory liquidation. As a result, KBR began consolidating the subcontracting entities in its financial statements effective January 15, 2018.
Ichthys LNG project. In January 2012, we formed a joint venture to provide EPC services to construct the Ichthys Onshore LNG Export Facility in Darwin, Australia ("Ichthys LNG project"). The project is being executed through two entities
(collectively, "JKC"), which are VIEs, in which we own a 30% equity interest. We account for our investments using the equity method of accounting. At December 31, 2021, our assets and liabilities associated with our investment in JKC recorded in our consolidated balance sheets under our STS business segment were $354 million and $1 million, respectively. These assets include expected cost recoveries from unapproved change orders and claims as well as estimated recoveries of claims against suppliers and subcontractors arising from issues related to changes to the work scope, delays and lower than planned subcontractor activity. See Note 6 to our consolidated financial statements for further discussion on the significant contingencies as well as unapproved change orders and claims related to this project.
U.K. Road projects. We are involved in 4 privately financed projects, executed through joint ventures, to design, build, operate and maintain roadways for certain government agencies in the U.K. We have a 25% ownership interest in each of these joint ventures and account for them using the equity method of accounting. The joint ventures have obtained financing through third parties that is nonrecourse to the joint venture partners. These joint ventures are VIEs; however, we are not the primary beneficiary. At December 31, 2021, included in our GS business segment, our assets and liabilities associated with our investment in this project recorded in our consolidated balance sheets were $42 million and none, respectively. Our maximum exposure to loss includes our equity investments in these ventures.
During the fourth quarter of 2021, we entered into an agreement to sell our interest in 3 of the U.K. Road projects. The settlement date of this transaction is expected to occur in the first quarter of 2022.
EBIC Ammonia project. Prior to the third quarter of 2021, we had an investment in a development corporation that has an indirect interest in the Egypt Basic Industries Corporation ("EBIC") ammonia plant project located in Egypt. We performed the EPC work for the project and completed our operations and maintenance services for the facility in the first half of 2012. Historically, we owned 65% of this development corporation and consolidated it for financial reporting purposes. The development corporation owns a 25% ownership interest in a company that consolidates the ammonia plant which is considered a VIE. The development corporation accounts for its investment in the company using the equity method of accounting. The VIE is funded through debt and equity. Indebtedness of EBIC under its debt agreement was nonrecourse to us. We were not the primary beneficiary of the VIE. During the third quarter of 2021, we sold our investment interest in the EBIC Ammonia project.
Related Party Transactions
We often provide engineering, construction management and other subcontractor services to our unconsolidated joint ventures and our revenues include amounts related to these services. For the years ended December 31, 2021, 2020 and 2019, our revenues included $361 million, $511 million and $684 million, respectively, related to services we provided to our joint ventures, primarily the Aspire Defence Limited joint venture within our GS business segment.
Amounts included in our consolidated balance sheets related to services we provided to our unconsolidated joint ventures and undistributed earnings for the years ended December 31, 2021 and 2020 are as follows:
| | | | | | | | | | | |
| December 31, |
Dollars in millions | 2021 | | 2020 |
Accounts receivable, net of allowance for doubtful accounts | $ | 35 | | | $ | 83 | |
Contract assets (a) | $ | 2 | | | $ | 2 | |
Other current assets | $ | 25 | | | $ | — | |
Contract liabilities (a) | $ | 5 | | | $ | 53 | |
| | | |
(a)Reflects contract assets and contract liabilities primarily related to joint ventures within our STS business segment.
Consolidated Variable Interest Entities
We consolidate VIEs if we determine we are the primary beneficiary of the project entity because we control the activities that most significantly impact the economic performance of the entity. The following is a summary of the significant VIEs where we are the primary beneficiary:
| | | | | | | | | | | |
Dollars in millions | December 31, 2021 |
Total Assets | | Total Liabilities |
| | | |
Fasttrax Limited (Fasttrax project) | $ | 23 | | | $ | 8 | |
Aspire Defence subcontracting entities (Aspire Defence project) | $ | 439 | | | $ | 245 | |
| | | | | | | | | | | |
Dollars in millions | December 31, 2020 |
Total Assets | | Total Liabilities |
| | | |
Fasttrax Limited (Fasttrax project) | $ | 45 | | | $ | 18 | |
Aspire Defence subcontracting entities (Aspire Defence project) | $ | 448 | | | $ | 205 | |
Fasttrax Limited project. In December 2001, the Fasttrax joint venture ("Fasttrax") was created to provide to the U.K. MoD a fleet of 91 new HETs capable of carrying a 72-ton Challenger II tank. Fasttrax owns, operates and maintains the HET fleet and provides heavy equipment transportation services to the British Army. The purchase of the assets was completed in 2004, and the operating and service contracts related to the assets extend through 2023. Fasttrax's entity structure includes a parent entity and its 100% owned subsidiary, Fasttrax Limited. KBR and its partner each own a 50% interest in the parent entity, which is considered a VIE. We determined that we are the primary beneficiary of this project entity because we control the activities that most significantly impact economic performance of the entity. Therefore, we consolidate this VIE.
The purchase of the HETs by the joint venture was financed through two series of bonds secured by the assets of Fasttrax Limited and a bridge loan. Assets collateralizing Fasttrax’s senior bonds include cash and equivalents of $6 million and net property, plant and equipment of approximately $13 million as of December 31, 2021. See Note 12 to our consolidated financial statements for further details regarding our nonrecourse project-finance debt of this VIE consolidated by KBR, including the total amount of debt outstanding at December 31, 2021.
Aspire Defence project (subcontracting entities). As discussed above, we assumed operational management of the Aspire Defence subcontracting entities in January 2018. These subcontracting entities exclusively provide the construction and the related support services under subcontract arrangements with Aspire Defence Limited. These entities are considered VIEs, and, because we are the primary beneficiary, they are consolidated for financial reporting purposes.
Note 12. Equity Method Investments and Variable Interest Entities
We conduct some of our operations through joint ventures, which operate as partnerships, corporations, undivided interests and other business forms and are principally accounted for using the equity method of accounting. Additionally, the majority of our joint ventures are VIEs.
The following table presents a rollforward of our equity in and advances to unconsolidated affiliates:
|
| | | | | | | |
Dollars in millions | 2019 | | 2018 |
Beginning balance at January 1, | $ | 724 |
| | $ | 365 |
|
Cumulative effect of change in accounting policy (a) | 29 |
| | 87 |
|
Adjusted balance at January 1, | 753 |
| | 452 |
|
Equity in earnings of unconsolidated affiliates | 35 |
| | 79 |
|
Distributions of earnings of unconsolidated affiliates | (69 | ) | | (75 | ) |
Payments from (advances to) unconsolidated affiliates, net | (10 | ) | | (12 | ) |
Investments (b) | 146 |
| | 344 |
|
Foreign currency translation adjustments | (7 | ) | | (28 | ) |
Other | 2 |
| | (36 | ) |
Balance at December 31, | $ | 850 |
| | $ | 724 |
|
| |
(a) | At January 1, 2018, 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. At January 1, 2019, we recognized a cumulative effect adjustment of $29 million as a result of the adoption of ASC 606 by our remaining unconsolidated project joint ventures. |
| |
(b) | Investments include $141 million and $344 million in funding contributions to JKC for the years ended December 31, 2019 and 2018, respectively. |
Equity Method Investments
Brown & Root Industrial Services Joint Venture.On September 30, 2015, we executed an agreement with Bernhard Capital Partners ("BCP"), a private equity firm, to establish the Brown & Root Industrial Services joint venture in North America. In connection with the formation of the joint venture, we contributed our Industrial Services Americas business and received cash consideration of $48 million and a 50% interest in the joint venture. As a result of the transaction, we no longer had a controlling interest in this Industrial Services business and deconsolidated it effective September 30, 2015. The Brown & Root Industrial Services joint venture offers engineering, construction and reliability-driven maintenance services for the refinery, petrochemical, chemical, specialty chemicals and fertilizer markets. Our interest in this venture is accounted for using the equity method and we have determined that the Brown & Root Industrial Services joint venture is not a VIE. Results from this joint venture are included in our ES business segment.
Summarized financial information
Summarized financial information for all jointly owned operations including VIEs that are accounted for using the equity method of accounting is as follows:
Balance Sheets
|
| | | | | | | |
| December 31, |
Dollars in millions | 2019 | | 2018 |
Current assets | $ | 3,072 |
| | $ | 3,526 |
|
Noncurrent assets | 3,219 |
| | 3,121 |
|
Total assets | $ | 6,291 |
| | $ | 6,647 |
|
| | | |
Current liabilities | $ | 949 |
| | $ | 1,277 |
|
Noncurrent liabilities | 2,922 |
| | 3,212 |
|
Total liabilities | $ | 3,871 |
| | $ | 4,489 |
|
Statements of Operations
|
| | | | | | | | | | | |
| Years ended December 31, |
Dollars in millions | 2019 | | 2018 | | 2017 |
Revenues | $ | 2,592 |
| | $ | 3,190 |
| | $ | 5,781 |
|
Operating income | $ | 92 |
| | $ | 197 |
| | $ | 278 |
|
Net income | $ | 48 |
| | $ | 173 |
| | $ | 145 |
|
Unconsolidated Variable Interest Entities
For the VIEs in which we participate, our maximum exposure to loss consists of our equity investment in the VIE and any amounts owed to us for services we may have provided to the VIE, reduced by any unearned revenues on the project. Our maximum exposure to loss may also include our obligation to fund our proportionate share of any future losses incurred. As of December 31, 2019, we do not project any losses related to these joint venture projects. Where our performance and financial obligations are joint and several to the client with our joint venture partners, we may be further exposed to losses above our ownership interest in the joint venture.
The following summarizes the total assets and total liabilities as reflected in our consolidated balance sheets related to our unconsolidated VIEs in which we have a significant variable interest but are not the primary beneficiary.
|
| | | | | | | |
| December 31, 2019 |
Dollars in millions | Total Assets | | Total Liabilities |
Affinity joint venture (U.K. MFTS project) | $ | 14 |
| | $ | 10 |
|
Aspire Defence Limited | $ | 67 |
| | $ | 5 |
|
JKC joint venture (Ichthys LNG project) | $ | 546 |
| | $ | 29 |
|
U.K. Road project joint ventures | $ | 40 |
| | $ | 21 |
|
Middle East Petroleum Corporation (EBIC Ammonia project) | $ | 47 |
| | $ | 1 |
|
|
| | | | | | | |
Dollars in millions | December 31, 2018 |
Total Assets | | Total Liabilities |
Affinity joint venture (U.K. MFTS project) | $ | 16 |
| | $ | 8 |
|
Aspire Defence Limited | $ | 68 |
| | $ | 5 |
|
JKC joint venture (Ichthys LNG project) | $ | 427 |
| | $ | 32 |
|
U.K. Road project joint ventures | $ | 37 |
| | $ | 10 |
|
Middle East Petroleum Corporation (EBIC Ammonia project) | $ | 51 |
| | $ | 1 |
|
Affinity. In February 2016, Affinity, a joint venture between KBR and Elbit Systems, 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. 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. The remaining 50% interest in these entities is held by Elbit Systems. KBR has provided its proportionate share of certain limited financial and performance guarantees in support of the partners' contractual obligations. The three project-related entities are VIEs; however, KBR is not the primary beneficiary of any of these entities. We account for KBR's interests in each entity using the equity method of accounting within our GS business segment. The project is funded through KBR and Elbit Systems provided equity, subordinated debt and non-recourse third party commercial bank debt. Our maximum exposure to loss includes our equity investments in the project entities as of December 31, 2019.
Aspire Defence project. In April 2006, Aspire Defence Limited, a joint venture between KBR and two other project sponsors, was awarded a privately financed project contract by the U.K. MoD to upgrade and provide a range of services to the British Army’s garrisons at Aldershot and around Salisbury Plain in the U.K. In addition to a package of ongoing services to be delivered over 35 years, the project included a nine-year construction program to improve soldiers’ single living, technical and administrative accommodations, along with leisure and recreational facilities. The initial construction program was completed in 2014. In late 2016, Aspire Defence Limited was awarded a significant contract variation, expanding services to be provided under the existing contract including new construction, program management services and facilities maintenance across the garrisons. Aspire Defence Limited manages the existing properties and is responsible for design, refurbishment, construction and integration of new and modernized facilities. We indirectly own a 45% interest in Aspire Defence Limited, the contracting company that is the holder of the 35-year concession contract. The project is funded through equity and subordinated debt provided by the project sponsors and the issuance of publicly-held senior bonds which are nonrecourse to KBR and the other project sponsors. The contracting company is a VIE; however, we are not the primary beneficiary of this entity as of December 31, 2018. We account for our interest in Aspire Defence Limited using the equity method of accounting. As of December 31, 2019, included in our GS segment, our assets and liabilities associated with our investment in this project, within our consolidated balance sheets, were $67 million and $5 million, respectively. Our maximum exposure to loss includes our equity investments in the project entities and amounts payable to us for services provided to these entities as of December 31, 2019.
Prior to January 15, 2018, we also owned a 50% interest in the joint ventures that provide the construction and the related support services under subcontract arrangements with Aspire Defence Limited. On January 15, 2018, Carillion plc, our U.K. partner in these joint ventures, entered into compulsory liquidation. As a result, KBR began consolidating the subcontracting entities in its financial statements effective January 15, 2018. See Note 4 to our consolidated financial statements for further discussion.
Ichthys LNG project. In January 2012, we formed a joint venture to provide EPC services to construct the Ichthys Onshore LNG Export Facility in Darwin, Australia ("Ichthys LNG project"). The project is being executed through two entities (collectively, "JKC"), which are VIEs, in which we own a 30% equity interest. We account for our investments using the equity method of accounting. At December 31, 2019, our assets and liabilities associated with our investment in JKC recorded in our consolidated balance sheets under our ES business segment were $546 million and $29 million, respectively. These assets include expected cost recoveries from unapproved change orders and claims against the client as well as estimated recoveries of claims against suppliers and subcontractors arising from issues related to changes to the work scope, delays and lower than planned subcontractor activity. See Note 8 to our consolidated financial statements for further discussion on the significant contingencies as well as unapproved change orders and claims related to this project.
U.K. Road projects. We are involved in four privately financed projects, executed through joint ventures, to design, build, operate and maintain roadways for certain government agencies in the U.K. We have a 25% ownership interest in each of these joint ventures and account for them using the equity method of accounting. The joint ventures have obtained financing through third parties that is nonrecourse to the joint venture partners. These joint ventures are VIEs; however, we are not the primary beneficiary. At December 31, 2019, included in our GS business segment, our assets and liabilities associated with our investment in this project recorded in our consolidated balance sheets were $40 million and $21 million, respectively. Our maximum exposure to loss includes our equity investments in these ventures.
EBIC Ammonia project. We have an investment in a development corporation that has an indirect interest in the Egypt Basic Industries Corporation ("EBIC") ammonia plant project located in Egypt. We performed the EPC work for the project and completed our operations and maintenance services for the facility in the first half of 2012. We own 65% of this development corporation and consolidate it for financial reporting purposes. The development corporation owns a 25% ownership interest in a company that consolidates the ammonia plant which is considered a VIE. The development corporation accounts for its investment in the
company using the equity method of accounting. The VIE is funded through debt and equity. Indebtedness of EBIC under its debt agreement is nonrecourse to us. We are not the primary beneficiary of the VIE. As of December 31, 2019, included in our ES business segment, our assets and liabilities associated with our investment in this project, within our consolidated balance sheets, were $47 million and $1 million, respectively. Our maximum exposure to loss includes our proportionate share of the equity investment and amounts payable to us for services provided to the entity as of December 31, 2019.
Related Party Transactions
We often provide engineering, construction management and other subcontractor services to our joint ventures and our revenues include amounts related to these services. For the years ended December 31, 2019, 2018 and 2017, our revenues included $684 million, $721 million and $133 million, respectively, related to services we provided to our joint ventures, primarily the the Aspire Defence Limited joint venture within our GS business segment.
Amounts included in our consolidated balance sheets related to services we provided to our unconsolidated joint ventures for the years ended December 31, 2019 and 2018 are as follows:
|
| | | | | | | |
| December 31, |
Dollars in millions | 2019 | | 2018 |
Accounts receivable, net of allowance for doubtful accounts | $ | 49 |
| | $ | 43 |
|
Contract assets (a) | $ | 2 |
| | $ | 1 |
|
Contract liabilities (a) | $ | 33 |
| | $ | 38 |
|
Accounts payable | $ | — |
| | $ | 2 |
|
| |
(a) | Reflects contract assets and contract liabilities primarily related to joint ventures within our ES business segment. |
Consolidated Variable Interest Entities
We consolidate VIEs if we determine we are the primary beneficiary of the project entity because we control the activities that most significantly impact the economic performance of the entity. The following is a summary of the significant VIEs where we are the primary beneficiary:
|
| | | | | | | |
Dollars in millions | December 31, 2019 |
Total Assets | | Total Liabilities |
KJV-G joint venture (Gorgon LNG project) | $ | — |
| | $ | 17 |
|
Fasttrax Limited (Fasttrax project) | $ | 45 |
| | $ | 24 |
|
Aspire Defence subcontracting entities (Aspire Defence project) | $ | 530 |
| | $ | 283 |
|
|
| | | | | | | |
Dollars in millions | December 31, 2018 |
Total Assets | | Total Liabilities |
KJV-G joint venture (Gorgon LNG project) | $ | 13 |
| | $ | 19 |
|
Fasttrax Limited (Fasttrax project) | $ | 49 |
| | $ | 34 |
|
Aspire Defence subcontracting entities (Aspire Defence project) | $ | 589 |
| | $ | 324 |
|
Gorgon LNG project. We have a 30% ownership in an Australian joint venture which was awarded a contract in 2005 for front end engineering design and in 2009 for EPC management services to construct an LNG plant. The joint venture is considered a VIE, and, because we are the primary beneficiary, we consolidate this joint venture for financial reporting purposes. We determined that we are the primary beneficiary of this project entity because we control the activities that most significantly impact economic performance of the entity. The Gorgon LNG project execution activities were completed and only commercial closeout activities remain as of December 31, 2019.
Fasttrax Limited project. In December 2001, the Fasttrax joint venture ("Fasttrax") was created to provide to the U.K. MoD a fleet of 91 new HETs capable of carrying a 72-ton Challenger II tank. Fasttrax owns, operates and maintains the HET fleet and provides heavy equipment transportation services to the British Army. The purchase of the assets was completed in 2004,
and the operating and service contracts related to the assets extend through 2023. Fasttrax's entity structure includes a parent entity and its 100% owned subsidiary, Fasttrax Limited. KBR and its partner each own a 50% interest in the parent entity, which is considered a VIE. We determined that we are the primary beneficiary of this project entity because we control the activities that most significantly impact economic performance of the entity. Therefore, we consolidate this VIE.
The purchase of the HETs by the joint venture was financed through two series of bonds secured by the assets of Fasttrax Limited and a bridge loan. Assets collateralizing Fasttrax’s senior bonds include cash and equivalents of $18 million and net property, plant and equipment of approximately $23 million as of December 31, 2019. See Note 14 to our consolidated financial statements for further details regarding our nonrecourse project-finance debt of this VIE consolidated by KBR, including the total amount of debt outstanding at December 31, 2019.
Aspire Defence project (subcontracting entities). As discussed above and in Note 4 to our consolidated financial statements, we assumed operational management of the Aspire Defence subcontracting entities in January 2018. These subcontracting entities provide the construction and the related support services under subcontract arrangements with Aspire Defence Limited. These entities are considered VIEs, and, because we are the primary beneficiary, they are consolidated for financial reporting purposes.
Acquisition of Noncontrolling Interest
In April 2018, we entered into an agreement to acquire the noncontrolling interests in the Aspire Defence subcontracting entities from our partner. See Note 4 to our consolidated financial statements for discussion of this transaction.
Note 13.11. Retirement Benefits
Defined Contribution Retirement Plans
We have elective defined contribution plans for our employees in the U.S. and retirement savings plans for our employees in the U.K., Canada and other locations. Our defined contribution plans provide retirement benefits in return for services rendered. These plans provide an individual account for each participant and have terms that specify how contributions to the participant’s account are to be determined rather than the amount of retirement benefits the participant is to receive. Contributions to these plans are based on pretax income discretionary amounts determined on an annual basis. Our expense for the defined contribution plans totaled $84 million in 2021, $83 million in 2020 and $63 million in 2019, $56 million in 2018 and $52 million in 2017.2019.
Defined Benefit Pension Plans
We have 2 frozen defined benefit pension plans in the U.S., 1 frozen plan in the U.K., and 1 frozen plan in Germany. Substantially all of our defined benefit plans are funded pension plans, which define an amount of pension benefit to be provided, usually as a function of years of service or compensation.
We used a December 31 measurement date for all plans in 20192021 and 2018.2020. Plan assets, expenses and obligations for our defined benefit pension plans are presented in the following tables.
| | | | | | | | | | | | | | | | | | | | | | | |
| United States | | Int’l | | United States | | Int’l |
Dollars in millions | 2021 | | 2020 |
Change in projected benefit obligations: | | | | | | | |
Projected benefit obligations at beginning of period | $ | 80 | | | $ | 2,326 | | | $ | 76 | | | $ | 1,988 | |
| | | | | | | |
| | | | | | | |
Service cost | — | | | 3 | | | — | | | 2 | |
Interest cost | 2 | | | 33 | | | 2 | | | 39 | |
Foreign currency exchange rate changes | — | | | (4) | | | — | | | 75 | |
Actuarial (gain) loss | (3) | | | (180) | | | 6 | | | 287 | |
Other | — | | | (1) | | | — | | | (1) | |
| | | | | | | |
Benefits paid | (5) | | | (75) | | | (4) | | | (64) | |
Projected benefit obligations at end of period | $ | 74 | | | $ | 2,102 | | | $ | 80 | | | $ | 2,326 | |
Change in plan assets: | | | | | | | |
Fair value of plan assets at beginning of period | $ | 64 | | | $ | 1,961 | | | $ | 60 | | | $ | 1,727 | |
| | | | | | | |
Actual return on plan assets | 7 | | | 94 | | | 7 | | | 189 | |
Employer contributions | 1 | | | 47 | | | 2 | | | 44 | |
Foreign currency exchange rate changes | — | | | (3) | | | — | | | 66 | |
Benefits paid | (5) | | | (75) | | | (4) | | | (64) | |
Other | (1) | | | (1) | | | (1) | | | (1) | |
Fair value of plan assets at end of period | $ | 66 | | | $ | 2,023 | | | $ | 64 | | | $ | 1,961 | |
Funded status | $ | (8) | | | $ | (79) | | | $ | (16) | | | $ | (365) | |
|
| | | | | | | | | | | | | | | |
| United States | | Int’l | | United States | | Int’l |
Dollars in millions | 2019 | | 2018 |
Change in projected benefit obligations: | | | | | | | |
Projected benefit obligations at beginning of period | $ | 71 |
| | $ | 1,751 |
| | $ | 77 |
| | $ | 2,046 |
|
Acquisitions | — |
| | — |
| | — |
| | 24 |
|
Service cost | — |
| | 2 |
| | — |
| | 2 |
|
Interest cost | 3 |
| | 50 |
| | 2 |
| | 50 |
|
Foreign currency exchange rate changes | — |
| | 46 |
| | — |
| | (114 | ) |
Actuarial (gain) loss | 7 |
| | 214 |
| | (4 | ) | | (184 | ) |
Other | — |
| | (1 | ) | | — |
| | — |
|
Plan amendments | — |
| | — |
| | — |
| | 20 |
|
Benefits paid | (5 | ) | | (74 | ) | | (4 | ) | | (93 | ) |
Projected benefit obligations at end of period | $ | 76 |
| | $ | 1,988 |
| | $ | 71 |
| | $ | 1,751 |
|
Change in plan assets: | | | | | | | |
Fair value of plan assets at beginning of period | $ | 54 |
| | $ | 1,518 |
| | $ | 59 |
| | $ | 1,673 |
|
Acquisitions | — |
| | — |
| | — |
| | 24 |
|
Actual return on plan assets | 10 |
| | 200 |
| | (3 | ) | | (28 | ) |
Employer contributions | 2 |
| | 43 |
| | 2 |
| | 39 |
|
Foreign currency exchange rate changes | — |
| | 41 |
| | — |
| | (96 | ) |
Benefits paid | (5 | ) | | (74 | ) | | (4 | ) | | (93 | ) |
Other | (1 | ) | | (1 | ) | | — |
| | (1 | ) |
Fair value of plan assets at end of period | $ | 60 |
| | $ | 1,727 |
| | $ | 54 |
| | $ | 1,518 |
|
Funded status | $ | (16 | ) | | $ | (261 | ) | | $ | (17 | ) | | $ | (233 | ) |
In October 2018, a U.K. High Court issued a ruling requiring U.K. defined benefit pension plans to provide equal pension benefits to males and females for guaranteed minimum pensions where plan participants accrued benefits during the period from May 1990 to April 1997. We have accounted for the change in law as a retroactive plan amendment resulting in a $20 million increase to prior service cost in "Other comprehensive income" for the year ended December 31, 2018 and a $20 million increase to the projected benefit obligation of our U.K. pension plan as of December 31, 2018. The prior service cost will be amortized out of AOCL as a component of net periodic benefit cost over the remaining life expectancy of the plan participants.
The Accumulated Benefit Obligation ("ABO") is the present value of benefits earned to date. The ABO for our United States pension plans was $76$74 million and $71$80 million as of December 31, 20192021 and 2018,2020, respectively. The ABO for our international pension plans was $2.0$2.1 billion and $1.8$2.3 billion as of December 31, 20192021 and 2018,2020, respectively.
|
| | | | | | | | | | | | | | | |
| United States | | Int’l | | United States | | Int’l |
Dollars in millions | 2019 | | 2018 |
Amounts recognized on the consolidated balance sheets | | | | | | | |
Pension obligations | $ | (16 | ) | | $ | (261 | ) | | $ | 17 |
| | $ | 233 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| United States | | Int’l | | United States | | Int’l |
Dollars in millions | 2021 | | 2020 |
Amounts recognized on the consolidated balance sheets | | | | | | | |
Other assets | $ | — | | | $ | 1 | | | $ | — | | | $ | — | |
Pension obligations | $ | (8) | | | $ | (80) | | | $ | (16) | | | $ | (365) | |
Net periodic pension cost for our defined benefit plans included the following components:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| United States | | Int’l | | United States | | Int’l | | United States | | Int’l |
Dollars in millions | 2021 | | 2020 | | 2019 |
Components of net periodic benefit cost | | | | | | | | | | | |
Service cost | $ | — | | | $ | 3 | | | $ | — | | | $ | 2 | | | $ | — | | | $ | 2 | |
Interest cost | 2 | | | 33 | | | 2 | | | 39 | | | 3 | | | 50 | |
Expected return on plan assets | (3) | | | (87) | | | (3) | | | (59) | | | (3) | | | (77) | |
Prior service cost amortization | — | | | 1 | | | — | | | 1 | | | — | | | 1 | |
| | | | | | | | | | | |
Recognized actuarial loss | 2 | | | 31 | | | 2 | | | 22 | | | 2 | | | 16 | |
Net periodic benefit cost | $ | 1 | | | $ | (19) | | | $ | 1 | | | $ | 5 | | | $ | 2 | | | $ | (8) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| United States | | Int’l | | United States | | Int’l | | United States | | Int’l |
Dollars in millions | 2019 | | 2018 | | 2017 |
Components of net periodic benefit cost | | | | | | | | | | | |
Service cost | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 1 |
|
Interest cost | 3 |
| | 50 |
| | 2 |
| | 50 |
| | 3 |
| | 53 |
|
Expected return on plan assets | (3 | ) | | (77 | ) | | (3 | ) | | (80 | ) | | (3 | ) | | (77 | ) |
Prior service cost amortization | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
Recognized actuarial loss | 2 |
| | 16 |
| | 2 |
| | 26 |
| | 1 |
| | 30 |
|
Net periodic benefit cost | $ | 2 |
| | $ | (8 | ) | | $ | 1 |
| | $ | (2 | ) | | $ | 1 |
| | $ | 7 |
|
The amounts in accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefit cost at December 31, 20192021 and 2018,2020, net of tax were as follows:
|
| | | | | | | | | | | | | | | |
| United States | | Int’l | | United States | | Int’l |
Dollars in millions | 2019 | | 2018 |
Unrecognized actuarial loss, net of tax of $9 and $215, $10 and $203, respectively | $ | 22 |
| | $ | 632 |
| | $ | 23 |
| | $ | 569 |
|
Total in accumulated other comprehensive loss | $ | 22 |
| | $ | 632 |
| | $ | 23 |
| | $ | 569 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| United States | | Int’l | | United States | | Int’l |
Dollars in millions | 2021 | | 2020 |
Unrecognized actuarial loss, net of tax of $8 and $198, $10 and $240, respectively | $ | 17 | | | $ | 564 | | | $ | 24 | | | $ | 740 | |
Total in accumulated other comprehensive loss | $ | 17 | | | $ | 564 | | | $ | 24 | | | $ | 740 | |
Estimated amounts that will be amortized from accumulated other comprehensive income, net of tax, into net periodic benefit cost in 20202022 are as follows:
| | | | | | | | | | | |
Dollars in millions | United States | | Int’l |
Actuarial loss | $ | 1 | | | $ | 20 | |
Total | $ | 1 | | | $ | 20 | |
|
| | | | | | | |
Dollars in millions | United States | | Int’l |
Actuarial loss | $ | 1 |
| | $ | 19 |
|
Total | $ | 1 |
| | $ | 19 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average assumptions used to determine net periodic benefit cost | |
| United States | | Int'l | | United States | | Int'l | | United States | | Int'l |
| 2021 | | 2020 | | 2019 |
Discount rate | 2.00 | % | | 1.40 | % | | 2.89 | % | | 2.05 | % | | 3.98 | % | | 2.90 | % |
Expected return on plan assets | 5.19 | % | | 4.67 | % | | 5.72 | % | | 3.70 | % | | 6.09 | % | | 5.09 | % |
|
| | | | | | | | | | | | | | | | | |
Weighted-average assumptions used to determine net periodic benefit cost | |
| United States | | Int'l | | United States | | Int'l | | United States | | Int'l |
| 2019 | | 2018 | | 2017 |
Discount rate | 3.98 | % | | 2.90 | % | | 3.33 | % | | 2.50 | % | | 3.73 | % | | 2.60 | % |
Expected return on plan assets | 6.09 | % | | 5.09 | % | | 6.01 | % | | 5.20 | % | | 6.01 | % | | 5.40 | % |
|
| | | | | | | | | | | |
Weighted-average assumptions used to determine benefit obligations at measurement date | |
| United States | | Int'l | | United States | | Int'l |
| 2019 | | 2018 |
Discount rate | 2.89 | % | | 2.05 | % | | 3.98 | % | | 2.90 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average assumptions used to determine benefit obligations at measurement date | |
| United States | | Int'l | | United States | | Int'l |
| 2021 | | 2020 |
Discount rate | 2.45 | % | | 1.80 | % | | 2.00 | % | | 1.40 | % |
Plan fiduciaries of our retirement plans set investment policies and strategies and oversee the investment direction, which includes selecting investment managers, commissioning asset-liability studies and setting long-term strategic targets. Long-term strategic investment objectives include preserving the funded status of the plan and balancing risk and return and have diversified asset types, fund strategies and fund managers. Targeted asset allocation ranges are guidelines, not limitations and occasionally plan fiduciaries will approve allocations above or below a target range.
The target asset allocation for our U.S. and International plans for 20202022 is as follows:
| | | | | | | | | | | |
Asset Allocation | 2022 Targeted |
| United States | | Int'l |
Equity funds and securities | 52 | % | | 22 | % |
Fixed income funds and securities | 39 | % | | 53 | % |
Hedge funds | — | % | | 7 | % |
Real estate funds | 1 | % | | 5 | % |
Other | 8 | % | | 13 | % |
Total | 100 | % | | 100 | % |
|
| | | | | |
Asset Allocation | 2020 Targeted |
| United States | | Int'l |
Equity funds and securities | 51 | % | | 22 | % |
Fixed income funds and securities | 39 | % | | 54 | % |
Hedge funds | — | % | | 7 | % |
Real estate funds | 1 | % | | 3 | % |
Other | 9 | % | | 14 | % |
Total | 100 | % | | 100 | % |