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.
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 sustainable 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. |
◦Deep domain expertise resident across nationally recognized subject matter experts.
◦Highly-cleared employee base.
•Sustainability Leadership
◦Our Zero Harm philosophy includes ten key areas of sustainability focus across our company and correspond with the United Nations’ (U.N.) Sustainable Development Goals (SDGs).
◦As signatories to the U.N. Global Compact, we align our business with the U.N. SDGs that serve as a benchmark for accomplishing our sustainability goals.
◦We have a dedicated Global Sustainability Committee made up of leaders from across key corporate and business functions, and the Chair of that Committee reports quarterly to the Board.
◦Achieved carbon neutrality from 2019 and established a 2030 operational net-zero carbon ambition.
◦Based on our Science Based Targets Initiative commitments, we have set preliminary reduction targets in line with a 1.5 degree Celsius ambition. These targets include a 25% reduction in business travel, renewable energy agreements and certifications and increasing our green fleets.
◦We have a dedicated Net Zero Roadmap project team working with each section of the business to measure and monitor GHG emissions for developing discrete and tailored reduction programs, alongside the corporate level reduction plans and targets.
◦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 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 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. |
Full Life-cycle Asset Support
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◦ | Comprehensive asset services through long-term contracts. |
•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
•Sustainable Technology Solutions
Energy Solutions
Non-core business segmentssegment
Non-strategic Business
Other
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, C5ISR, cyber analytics, space domain awareness, test and evaluation, systems integration and program management, global supply chain management and operations readiness and support. With the acquisition of Frazer-Nash Consultancy Limited ("Frazer-Nash") on October 20, 2021, we have expanded our broad range of professional advisory services that deliver high-end systems engineering, systems assurance and technology to operationscustomers across the defense, renewable energy and critical infrastructure sectors in the U.K. Additionally, with the acquisition of VIMA Group ("VIMA") on August 2, 2022, we deliver solutions across a number of large-scale, high priority digital transformation programs to support maintenanceour clients in ensuring availability of effective digital and field logistics. Ourinformation technology as guided by the U.K.'s Digital Strategy for Defence. Additional information relating to the Frazer-Nash and VIMA acquisitions have been integrated with our existing operations asis described in Part II of this Annual Report on Form 10-K in Note 4 to our consolidated financial statements.
Hydrocarbons Sector
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 accelerate and catalyst supply, digitalenable energy transition across the industrial base in four primary verticals: ammonia/syngas, chemical/petrochemicals, clean refining and circular process/circular economy solutions. STS also provides highly synergistic services including advisory and consulting focused on broad-based energy transition and net-zero carbon emission solutions, high-end engineering, design and associated knowledge-based services into a global business for refining, petrochemicals, inorganicprogram management centered around decarbonization, energy efficiency, environmental impact and specialty chemicalsasset optimization, as well as gasification, syngas, ammonia, nitric acidour digitally-enabled operating and fertilizers. Our TS business segment has led the way in the development of advanced digital and proprietary tools and floating systemsmonitoring solutions. FromThrough early planning throughand scope definition, advanced technologies and projectfacility life-cycle support,optimization, 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.
We provide services to a diverse customer base, including domestic and foreign governments and commercial and industrial 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 contracts with U.S. and U.K. government agencies for which we serve are the prime contractor, as well as for those contracts in which we are a subcontractor and the ultimate customer is a U.S. or U.K. government agency, respectively.
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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 | 2022 | | 2021 | | 2020 |
| U.S. government (all agencies) | $ | 4,034 | | | 61 | % | | $ | 5,122 | | | 70 | % | | $ | 3,079 | | | 53 | % |
| U.K. government (all agencies) | $ | 584 | | | 9 | % | | $ | 508 | | | 7 | % | | $ | 573 | | | 10 | % |
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 Note 1 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
Recent Developments
VIMA Acquisition
On August 2, 2022, we acquired VIMA, a U.K. based leading provider of digital transformation solutions to defense and other public sector clients. VIMA Group delivers solutions across a number of large-scale, high priority digital transformation programs to support its clients in ensuring availability of effective digital and information technology as guided by the U.K.'s Digital Strategy for Defence. The company is a trusted advisor and a top five supplier to Defence Digital and Navy Digital – both organizations within the UK MoD with several highly competitivestrategic, fast-growing programs.
Mura Technology Investment
In June 2022, we announced that we entered into an agreement to invest an additional £80 million in Mura Technology ("Mura") that will bring KBR's aggregate investment in Mura to approximately 18.5%. This investment provides Mura incremental capital to accelerate development of its plastics recycling projects and enables KBR to participate more fully in this sustainability-focused, high growth sector. Funding will be made in two tranches with the first payment made in the quarter ended June 30, 2022 and the remainder in 2023. With a strategic approach to commercializing and scaling its proprietary, differentiated plastics recycling solution, Mura is well positioned for profitable growth and value creation as the plastics circular economy develops and matures.
Phase 1 of Plaquemines LNG Full Notice to Proceed
In May 2022, KBR's joint venture with Zachry Group, KZJV, was issued a full notice to proceed with Phase 1 of Plaquemines LNG. KZJV, in which KBR holds a non-majority interest, will integrate highly modularized, owner-furnished equipment for the most part require substantial resources13.3 million tonnes per annum (MTPA) nameplate facility. KBR will provide project management, engineering, program integration and highly skilledinterface management and experienced technical personnel. A large numbercommissioning support under an innovative commercial structure that promotes collaboration and enhances overall program performance.
HomeSafe Alliance LLC Contract Award
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 companies are competingall options periods. HomeSafe is the exclusive household goods move management service provider for the U.S. Armed Forces, U.S. DoD civilians and their families. Under this contract, HomeSafe plans to modernize and infuse technology to improve the global relocation experience for all military personnel and their families. In October 2022, the award was upheld in 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 HamiltonCourt of Federal Claims, and international-based companies such as Bechtel, Jacobs Engineering, Chiyoda Corporation ("Chiyoda"), TechnipFMC, Worley-Parsons and Vectrus, Inc. Because the marketsperiod for our services are vast and extend across multiple geographic regions, we cannot make a definitive estimateappeal of the total numberCourt's decision has expired. Subsequent to the Court of our competitors.Federal Claims ruling, U.S. Transportation Command lifted the stop work order on the contract in November 2022 and KBR is proceeding with work under the award.
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, 2019.2022.
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 was 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.
KZJV is a joint venture with Zachary Group that performs certain design, engineering, procurement and construction-related services for a LNG facility in Plaquemines Parish, Louisiana. KBR owns a 45% interest in KZJV, which is a VIE. The investment is accounted for within our STS business segment using the equity method of accounting.
HomeSafe, a KBR led joint venture with Tier One Relocation, was established to be the exclusive provider of household goods move management services for the U.S. Armed Forces, U.S. DoD civilians and their families. KBR owns a 72% interest in HomeSafe. The joint venture is a VIE that is consolidated for financial reporting purposes and is accounted for within our GS business segment.
Additional information relating to our joint ventures is described in Part II of this Annual Report on Form 10-K in Note 10 to our consolidated financial statements.
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 consolidated and 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 $14.6were $15.6 billion and $13.5$15.0 billion as of December 31, 20192022 and 2018,2021, respectively, with approximately 18%25% and 22%17%, 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%2022, 36% of our backlog will be recognized as revenues or equity in earnings of unconsolidated affiliates within fiscal 2020.year 2023. 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 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 COVID-19 pandemic and other political and economic conditions have resulted in significant supply chain disruptions and inflation 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 materials, including the continued impact of the 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 servicespolitical conditions. These potential increased costs could have a material adverse effectreduce profitability on our business.contracts, particularly those that are fixed price. 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,which may be 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.environmental protection.
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 costs 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 and 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.
Every day, the people of KBR help solve some of the world’s most challenging scientific, technological and engineering problems. From our promising new interns to world-renowned experts, this diverse Team of Teams delivers for our customers, so in turn, we put them first. At the end of 2022, we employed approximately 30,000 people performing diverse, complex and mission critical roles in 34 countries. In addition, our unconsolidated joint ventures employ approximately 9,000 employees.
Our Employee Value Proposition ("EVP") is the unique set of experiences and offerings that help differentiate KBR from other competitors for our employees’ time and talents and describes in practical terms how we put our people first.
Purpose & Values
At the tip of our EVP is Purpose and Values. Our vision is to bring together the best and brightest employees to deliver technology and solutions that help our customers accomplish their most critical missions and objectives. We prioritize conductingbelieve the work we do is important and inspiring, enabling us to attract and retain some of the world’s best talent, who thrive in this purposeful environment where they can make a difference.
Our values are the glue that binds us together across our diverse global cultures, guiding our behavior and decision making across KBR. Since refreshing our values in 2020, we have embedded them in our business processes, celebrated employees who epitomize our values-led behavior and established them as a foundation for our learning and development activities. Even with ethicsthe challenges of transitioning to a long-term hybrid and integrity. remote working environment, we have been successful in maintaining our corporate culture as our employees have told us that their experience is fully aligned to our values.
While our One KBR Values unite us, as a global business operating in distinct markets and environments, we recognize and respect that our cultures are different. Acknowledging this diversity, our sustainability culture weaves a golden thread through KBR. Our employees take enormous pride in being part of an organization with a philosophical, practical and proven commitment to Zero Harm.
Health and Safety
We are subject to numerous compliance-relatedworker 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 FCPA, the U.K. Bribery Act, other applicable anti-bribery legislation and laws and regulations regarding trade and exports. The serviceswhere we provide to the U.S. federal government are subject to the FAR,various regulations enacted by the Truth in NegotiationsHealth and Safety Act CAS, the Services Contract Act, DoD security regulations, and many other laws and regulations.of 1974. These laws and regulations affect howare frequently changing, and it is impossible to predict with certainty the effect of such laws and regulations on us in the future.
Our commitment to the health and safety of each employee as well as anyone we transact businesswork with is the foundation of our clientsZero Harm culture. We know that our employee’s willingness to implement each commitment into their daily work tasks is vital to our operations and has contributed to our strong safety performance among our customers, partners and peers.
The six core processes that comprise our Transactional Health, Safety, Security, Environmental ("HSSE") Management that lead to Transformational Leadership are non-negotiable KBR safety standards that are required to be observed and followed by employees and contractors at all locations and projects. By requiring all of our employees to personally internalize and adhere to these standards, we aim to safeguard our individual health and safety and the well-being of all those around us.
The way we live, work and interact was abruptly altered with the COVID-19 pandemic, but KBR remained vigilant and our people’s commitment to health, safety and security never wavered during this challenging time. KBR quickly implemented safe work practices and procedures aimed at keeping our employees, contractors and visitors safe during the pandemic.
We believe KBR has provided the tools and processes our people need to achieve the mindset of 24/7 Zero Harm. One process known as the Courage to Care Conversation, is instrumental in some instances, impose additional costsdeveloping a continual awareness of unsafe acts through observation, intervention and conversation. A web-application to log a conversation was created in-house and is available to all KBR employees. The goal of the Courage to Care Conversation is to continuously evaluate the work environment and to focus on people and their actions.
Thanks to our business operations. We are also governed bypeople's commitment to our ownZero Harm culture, we recorded another consecutive year of industry-leading HSSE performance, with a total recordable incident rate of 0.079.
Our Journey to Zero Harm has allowed us to create a company culture where safe execution is non-negotiable and people take responsibility and accountability. When it comes to safety, we strive for one number: Zero.
Ethics and Compliance
Our Code of Business Conduct (our "Code"(the “Code”) is essential to how we as a Team of Teams interact with the world around us and to our success. The Code is based on our One KBR Values, and, in particular, “We are People of Integrity” guides us in everything we do. We will be rolling out a revised Code of Business Conduct in the first half of 2023 that aligns more closely with our values, demonstrates KBR’s commitment to integrity and provides additional guidance to employees about how to always make integrity-based decisions.
We believe an ethical culture, where employees are treated fairly, respectfully, and without favoritism, is key to employee satisfaction and retention. We promote a speak-up culture where employees are comfortable with making reports of possible unethical behavior and workplace issues. The Business Integrity Team has implemented a Question Manager as part of our Ethics Hotline for employees to receive advice, confidentially or anonymously, for ethical or other inquiries. Employees speaking-up and reporting issues enables us to address and remediate these issues early and effectively while instilling confidence that employee concerns are heard and addressed. The recent People Perspective Survey indicates that a significant majority of our employees feel safe to report misconduct and reflects our dedication to an ethical culture.
Retaliation is not tolerated and undermines a speak-up culture. Our Code sets forth our anti-retaliation commitment, which is reinforced in our communications and our annual Ethics training. To further convey to the workforce that reports of unethical behavior are investigated and remediated, the Ethics training incorporates incidents of past misconduct. The “lessons learned” approach provides further guidance to employees that unethical behavior will not be tolerated and demonstrates our continued commitment to our value: We are People of Integrity.
Career
As well as providing meaningful work from Day 1, our employees and job applicants are attracted to KBR because of the opportunity to develop personally and reach their full potential. Therefore, Career Development is a valuable component in our EVP. We have a good reputation for providing growth opportunities and continue to focus on enhancing these growth prospects in a number of ways throughout 2022.
Early Career Professionals
In 2022, we continued to provide technical and professional development, networking and community outreach opportunities through IMPACT, our long-standing Employee Resource Group (“ERG”) for early career professionals. Initiatives in 2022 included:
•One Ocean, where IMPACT members work with schools and environmental and like-minded organizations to develop creative, practical solutions to ecological challenges facing the world today;
•Virtual site visits, where graduates and other compliance-related corporate policiesemployees have used HoloLens technology to see how their engineering designs are coming to life on the other side of the planet; and procedures
•Launch Pad, a newly developed one-stop shop of learning and educational resources to help early career professionals jumpstart their professional development journey within KBR.
Technical Professionals
For our Technical Talent, our One KBR Tech Fellows program provides funding and opportunities for these world-leading scientists and technical professionals to conduct advanced research into topics ranging from carbon capture to machine learning. Our Fellows also provide valuable input into strategy development, business development and talent development within KBR. KBR Communities of Interest ("COIs") are collaborative, virtual forums for subject matter experts and those who support them. Our COIs continue to evolve, ensuring that mandate compliancesubject matter experts across the globe can connect and collaborate on Data Science & Analytics, Digital Engineering, Cloud, Cyber and other technical specialties that inform our customers’ and society’s greatest challenges today.
Leadership
In 2022, another cohort graduated from our Global Leadership Development Program designed to expand the capabilities of future C-suite leaders. As well as developing strategic thinking through research projects ranging from sustainability investments to digital supply chain solutions, these leaders attended intense learning events focused on executive skills and
leading courageously and with integrity. At the other end of the leadership career ladder, we completed the pilot of our new Front Line Leaders program, designed to support employees newly transitioning into these laws.critical roles. Following the success of this pilot, we plan to roll the program out globally, starting in 2023.
Succession Planning
In 2022, we significantly expanded the scope of our Talent Calibration conversations, covering almost 3,000 KBR employees in this rigorous assessment of performance and potential. As well as providing organization-wide talent trends and data, these conversations lead to individual career plans and added rigor to our succession plans. The Board Nominations & Corporate Governance Committee received regular updates on this process throughout the year, culminating in detailed discussions on updated succession plans for the CEO and Executive Leadership Team.
Performance Management
2022 also saw the expansion of our new agile approach to performance management, focused on forward-looking discussions on performance and priorities between managers and their team members. Our Codeemployee survey showed that this modern, real-time performance management approach was welcomed by a majority of participants, helping us retain critical talent, so in 2023 we plan to adopt Agile Performance & Development across KBR.
Work Environment
Central to our EVP is the overall employee experience at KBR, and we aim to differentiate KBR by creating the best work environment that we can for our employees, encompassing matters such as our approaches to Inclusion & Diversity (“I&D”), Employee Engagement and Employee Resource Groups.
The adoption of flexible working practices for many people in KBR continues to help us attract and retain the best talent, no matter where in the world they work. Additionally in 2022, our major businesses and functions also started introducing more flexible working practices, such as part-time or job-share opportunities, to widen our talent reach even further. Our employees appreciate this approach as evidenced by our survey results.
Inclusion & Diversity
At KBR, we aim to become a guidemagnet for diverse talent, known for a culture of belonging and equality. Our commitment to I&D helps us innovate, helps our global Team of Teams perform and helps create an environment where everyone can belong. We believe we have made significant progress over many years and our progress is acknowledged by our employees.
To help us continue our progress in I&D, we review trends and patterns using anonymized employee demographics to ensure we are providing equality of opportunity for all. We plan to expand our data capture further in 2023, encompassing veteran status and sexual preference. Having this data helps us monitor our I&D progress, however, we respect our employees’ right to privacy. We maintain strict confidentiality for all those who voluntarily disclose and provide opt-out options for those who prefer not to disclose their personal information.
As of December 31, 2022, our employees voluntarily self-disclosed the following gender and race/ethnicity demographics:
Our Board of Directors is 30% female and 30% ethnic or racial minority. Our Executive Leadership Team ("ELT") is 25% female and 8% ethnic or racial minority.
In 2022, our I&D Council researched best practices for inclusion of people with disabilities, advancement of women into operational and business leadership roles and retention of diverse talent. We plan to incorporate their recommendations into our I&D Improvement Plans in 2023 for every business and function. Their continued efforts help us to further build our reputation as a leader in this space, which was once again epitomized in 2022 when we retained our listing as one of Fortune’s World’s Top Female-Friendly Employer.
Employee Engagement
Our annual employee survey measures our progress through the eyes of our people. Having completed our first global survey in applying legal2021, in 2022 we went a step further by partnering with Great Place to Work to conduct the survey on our behalf, enabling us to expand the languages in which the survey was conducted and ethical practicesbenchmark how we perform compared to other similar organizations. As well as facilitating a dramatic increase in participation levels, this partnership resulted in KBR being certified as a Great Place to Work in several countries, including the U.S., U.K., Australia and India.
We were also pleased to note significant improvements in a number of survey focus areas from 2021, including:
•Promotions – we launched guidance for employees and managers in 2022 to ensure our promotions processes are fair and transparent, resulting in a substantial increase in positive scores for this survey topic;
•Fun – with people regularly back in the workplace, our social scene has been on overdrive in 2022 and we made a concerted effort to celebrate individual and team successes, resulting in another significant uplift in survey scores for this survey topic; and
•Development – the roll-out of Agile Performance Management and other initiatives outlined above helped secure a positive response from employees regarding career and personal development.
In addition to the 12,000 employee comments, the data from our survey was reviewed in detail by different team leaders and across different business areas, resulting in tailored action plans that are already being executed across KBR.
Employee Resource Groups
During 2022, we undertook a global communications program focused on Connections, to help reinforce our Team of Teams value in the new world of hybrid working. Our Connections program also benefited from the inspiring work of our ERGs, which we believe continues to provide a crucial platform for all employees to have a voice at KBR. As well as IMPACT’s work described above, we have OK NoW, focused on Mental Health & Fitness, and a range of I&D focused ERGs,
which come together to collaborate in the All-In Community. With events ranging from book clubs and picnics to discussions on pay equity and mindfulness, the ERGs create a vibrant community for networking, advocacy and education across KBR.
Compensation & Benefits
The final piece of the EVP puzzle relates to our everyday work. In particular,remuneration strategy and how we provide a good total reward package to our Code describes our standardspeople. Competition for talent continued to be fierce in 2022, compounded by high levels of integrity and relevant principles and areasinflation in the general economy. Recognizing the impact of law most likely to affect our business. We regularly trainthe fluid economic environment on our employees, regardingat the beginning of the year, we committed to carry out an additional mid-year salary review. By staying current with pay trends and partnering with our Codecustomers, we applied an additional increase in compensation mid-year for select employees across various levels in the organization. We simultaneously embedded a systematic approach to pay equity and are increasing our focus on pay transparency, both of which support our I&D strategy.
Through 2022, we introduced improved benefits packages for many employees. For example, we undertook a comprehensive benefits strategy review in the US, and designed innovative offerings based on direct employee feedback, which helped address their diverse personal preferences. We also focused on family-friendly benefits as part of our benefits roadmap in 2022 and have enhanced our parental leave offerings across the U.S., U.K. and India.
Talent Acquisition
While the different components of our EVP outlined above help us attract and retain some of the best talent in KBR, we recognize that the ‘war for talent’ demands continued innovation and improvement in Talent Acquisition. In 2022, we invested considerably to raise KBR’s brand awareness while providing an attractive and streamlined candidate journey to ensure we have the right people in the right place at the right time.
We appointed one of our senior People function leaders as a global leader for talent acquisition, helping bring together our community of recruiters to identify and institute best practices from sourcing to onboarding.
At the same time, we have increased our social media presence through campaigns such as ‘Belong, Connect, Grow – Change the World’ on LinkedIn, which focuses on real people doing important work and creates a buzz around KBR. Our brand collateral has also expanded, with new videos being produced, innovations such as a ‘digital postcard’ which highlights our EVP and tells the compelling KBR story, and a refreshed Career Site showcasing our people, our values and our impact on society.
During 2022, we also invested in a new Candidate Relationship Management platform that is integrated with our HR system. This platform uses artificial intelligence to promote suitable career opportunities to candidates, helps implement ongoing marketing campaigns and enables recruiters to focus on attracting and securing talent rather than dedicating time and resources to administrative matters.
Finally, upskilling and supporting hiring managers has also been a major area of focus, as they re-learn the skill of ‘selling’ to candidates at the same time as assessing their suitability for a role at KBR. We have provided them new support materials such as our Hiring Manager Playbook which includes tips, FAQs, key statistics and other specific areas including anti-bribery compliancepractical guidance to help us secure the best talent.
As a result of this innovation and international trade compliance.team effort, we hired over 7,000 employees in 2022, supporting our ability to deliver excellent solutions for our customers and meet our strategic growth targets. Of the new hires, 27% are female and 47% are an ethnic or racial minority.
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
A significant portion of our revenues is generated by large, recurring business from certain significant customers, including the U.S. government. A loss, cancellation or delay in projects by our significant customers in the future could 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 61% of our total consolidated revenues for the year ended December 31, 2022. Budget uncertainty, the potential for U.S. government shutdowns, the use of continuing resolutions and the federal debt ceiling can adversely affect our industry and the funding for our contracts. If appropriations are delayed or a government shutdown were to occur and were to continue for an extended period of time, we could be at risk of contract cancellations and other disruptions and nonpayment. When the U.S. government operates under a continuing resolution, new contract starts are restricted and funding for our programs may be unavailable, reduced or delayed. Shifting funding priorities or federal budget compromises, also could result in reductions in overall defense spending on an absolute or inflation-adjusted basis, which could adversely impact our business.
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, results of operations and cash flows.
The ongoing conflict between Russia and Ukraine, and other geopolitical conditions, may adversely affect our business and results of operations.
The U.S. government awards its contracts throughPolitical, economic and other conditions in foreign countries and regions, including geopolitical risks such as the current conflict between Russia and Ukraine, may adversely affect our business and operations as a rigorous competitive process andportion of our revenue is derived from foreign operations. During 2022, we continue to carry out efforts to obtainwind down our operations in Russia in a responsible manner. We do not expect this to have a material adverse impact on our results of operations in the long term. However, current and potential future contracts fromsanctions and trade control measures implemented against Russia in response to the U.S.conflict may have an impact on our ability to operate in the ordinary course of business as we wind down our operations in Russia. Any alleged or actual failure to comply with these measures may subject us to government scrutiny, civil and/or criminal proceedings, sanctions and other liabilities, which may be unsuccessful.
The U.S. government conducts a rigorous competitive process for awarding most contracts. Inhave an adverse effect on our international operations, financial condition and results of operations. Additionally, 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, contractsfull scope, duration and broader implications of this conflict, which may include both fixed-priceadditional international sanctions, embargoes, regional instability and cost-reimbursable elements. The U.S. government also favors multiple award task order contractsgeopolitical shifts; increased tensions between the United States and countries in which several contractors are selected as eligible bidders for future work. Such processes require successful contractors to continually anticipate customer requirementswe operate; and develop rapid-response bidthe extent of the conflict's effects on our business and proposal teamsresults of operations as well as maintain supplier relationshipsthe global economy, cannot be predicted.
To the extent the current conflict between Russia 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 resultUkraine or other geopolitical conflicts adversely affect our business, they may also have the effect 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. Manyheightening 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 sharingrisks identified 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. As discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in thethis Annual Report on Form 10-K, the awardany of the Logistics Civil Augmentation Program ("LOGCAP") V to us in April 2019 by the U.S. Army is currently under protest.
If we are unable to attractwhich could materially and retain a sufficient number of affordable trained engineers, craft labor, and other skilled workers, our ability to pursue projects may be adversely affected and our costs may increase.
Our rate of growth and the success of our business depend upon our ability to attract, develop and retain a sufficient number of affordable trained engineers, craft labor and other skilled workers either through direct hire, subcontracts or acquisition of other firms employing such professionals. The market for these professionals is competitive. If we are unable to attract and retain a sufficient number of skilled personnel, our ability to pursue projects may be adversely affected, the costs of executing our existing and future projects may increase and our financial performance may decline.
Dependence on third-party subcontractors and equipment manufacturers could adversely affect our profits.
We rely on third-party subcontractorsbusiness and equipment manufacturers in order to complete manyresults 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, our ability to complete a project in a timely fashion or at a profit may be impaired. If the amount weoperations. Such risks include, but 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. Furthermore, certain subcontractors and suppliers, such as those used on our U.S. government contracts, are subject 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 resultfollowing:
•adverse effects on macroeconomic conditions, including inflation, demand for our products and potential recessionary economic conditions;
•increased cyber security threats;
•adverse changes in a loss on a project for which the services, equipment or materials were needed.trade policies, taxes, government regulations and tariffs;
Some of •our U.S. government work requires KBR and certain of its employees to qualify for and retain a government-issued security clearance.
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 unableability to obtain compensation for increased costs incurred related to rising costs of equipment, materials and labor on fixed-price contracts;
•our ability to implement and execute our business strategy;
•disruptions in global supply chains;
•our exposure to foreign currency fluctuations; and
•constraints, volatility 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 resultdisruption in the terminationcapital markets.
The COVID-19 pandemic and other pandemics, epidemics, outbreaks of any existing contracts requiring such clearances.
Our use of the cost-to-cost method of revenue recognition could result in a reductioninfectious diseases 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, wepublic health crises 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,disrupted 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, which could have a material adverse effect on our financial condition andfuture results of operations.operations and financial performance.
The naturespread of our contracts, particularly those that are fixed-price, subjects us to risks associated with cost overruns, operating cost inflationCOVID-19 and potential claims for liquidated damages.
We conductother pandemics, epidemics, outbreaks of infectious diseases or public health crises across the globe have disrupted, and may in the future disrupt 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 estimatewhich 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.
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 could have a material adverse impact on our liquidity and financial results.
For example, we executed a project as a partner in the JKC joint venture with JGC and Chiyoda, on a joint and several basis, for the design, procurement, fabrication, construction, commissioning and testing of the Ichthys Onshore LNG export facility in Darwin, Australia. As further discussed in Notes 8 and 12 to our consolidated financial statements, the project experienced significant cost increases associated with a variety of issues related to changes to the scope of work, delays and lower than planned 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 funded JKC for our proportionate share of the working capital requirements to complete the project. JKC's current estimates for the unapproved change orders and claims against the client and estimated recoveries of claims against suppliers and subcontractors may prove inaccurate and potentially result in refunds to the client for amounts previously paid to the joint venture or the inability of the joint venture to recover additional costs from its suppliers and subcontractors. We have letters of credit outstanding in support of performance and warranty guarantees that may be called by the client under certain events. To
the extent these letters of credit are called by the client, we would be required 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 events could result in material changes to the estimated revenue, costs and profits at completion on the projectmaterially and adversely affect our financial condition, results of operations, and cash flows.
Our U.S. government contract work is regularly reviewed and audited by our customer, U.S. government auditors and others, and these reviews can leadflows and/or future expectations. With respect 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 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 onCOVID-19, our business, operations and financial performance. With respect to any particular country, these risks may include, but not be limited to:
expropriationperformance have been, and nationalization of our assets in that country;
political 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 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 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 on 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. portion of our GS business segment where both revenues and costs tend to be denominated in British pounds. 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, 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 course 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.
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 portion of our revenuesthe still ongoing macroeconomic impacts resulting from contracts with agencies and departments of the U.S., 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.COVID-19 pandemic. As a significant government contractor,result, our financial performance isand growth rates may differ significantly from pre-pandemic historical periods, and our future results may fall below expectations. Any health crisis may 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. The extent to which our business will continue to be affected and may in the future be affected depends on a number of factors outside of our control, including:
•labor disruptions due to (i) worker health and availability, (ii) pandemic-related restrictions limiting worksite access or shutting down facilities to ensure the safety of employees and others, (iii) difficulty recruiting, retaining, training, motivating and developing employees due to evolving health and safety protocols, changing worker expectations and market competition regarding return to office and flexible work models and (iv) the challenges of maintaining our strong corporate culture valuing communication, collaboration and connections despite a majority of employees working remotely;
•increased cyber security risk and data accessibility disruptions due to remote working arrangements;
•recommendations of, or restrictions imposed by, government and health authorities, including travel bans, quarantines and vaccine mandates to address the allocationCOVID-19 outbreak;
•potential contract delays, modifications or terminations;
•continued or additional supply chain disruptions which could impair our ability to perform under our contracts or deliver services and prioritizationproducts on a timely basis, resulting in potential contract delays, modifications or terminations;
•reductions in the number and amounts of new government spending. Factors that could affect current and future government spending include:
policycontract awards, delays in the timing of anticipated awards 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 orpotential cancellations of government programs or requirements;
adoptionsuch prospects as a result 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 for our hydrocarbons services and technologies depends on demand and capital spending by customers, in their target markets, many of which are cyclical in nature.
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 for 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 could 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 higherincreased material and contractor prices impacting facilityequipment costs can similarly reduce or defer major expenditures given the long-term natureresulting from inflation and supply chain disruptions;
•increased cost and reduced availability 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 demandcapital 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;capital expenditures;
the global level•increased costs 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 relationshipoperation attributed to climate change; and
reduction in demand for the commodity-based markets ininflation, which we operate.
Our backlog of unfilled orders is subject to unexpected adjustments and cancellations and, therefore,costs may not be a reliable indicator of our future revenuesfully recoverable or earnings.adequately covered by insurance; and
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•long-term disruption of the customer. From time to time, changes in project scope may occur with respect to contracts reflected in our backlogU.S. and could reduce the dollar amount of our backlog or the timing of the revenuesglobal economy and profits that we ultimately earn. Projects may remain in our backlog for an extended period of time because of the nature of the projectfinancial 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.commodity markets.
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 adverse effect on the margins we generate from our projects as well as our ability to maintain or increase market share.
A portion of our revenues is generated by large, recurring business from certain significant customers. A loss, cancellation or delay in 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 revenues 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 are challenged or 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.
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 market 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 advantages. It is strategically important that we lead the digital transformation occurring in our industry. We may not be successful in structuring our technology or developing, acquiring or implementing technology systems in ways that are competitive and responsive to the needs of our customers. We may lack sufficient resources to continue to make the significant technology investments to effectively compete with our competitors. Certain technology initiatives that management considers important to our long-term success will require capital investment, have significant risks associated with their execution and could 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 relationships with our customers and negatively impact our financial condition and results of operations. There can be no assurance that others will not acquire similar or superior technologies sooner than we do or that we will acquire technologies on an exclusive basis or at a significant 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 materially adversely affected.
If we are unable to attract and retain senior management and 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 reputation may be negatively impacted.
The reimagined KBR and its forward-looking solutions strategy includesrequires talent with dynamic and elite skills as KBR moves upmarket. Our rate of growth and the considerationsuccess of our business acquisitions,depend upon our ability to attract, develop, retain and replace key qualified technical and management professionals, either through direct hire, subcontracts or acquisition of other firms, who possess the elite skills to successfully deliver the solutions strategy. The market for these professionals is 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 professionals, our ability to pursue projects may be adversely affected, our operating income may decline, and our reputation may be damaged.
Our future success depends on the continued services of our executive officers as well as our ability to effectively transition to their successors. Our inability to attract, develop and retain qualified employees that can succeed our executive officers could have a material adverse effect on our operating income and reputation.
The nature of our 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 recover on these types of claims fully or promptly could have a material adverse impact on our liquidity and financial results.
For example, we have a 30% ownership interest in JKC, which was contracted to perform the engineering, procurement, supply, construction and commissioning of onshore LNG facilities for a client in Darwin, Australia (the "Ichthys LNG Project"). Prior to completion, the project experienced significant cost increases associated with a variety of issues related to delays, changes in the scope of work and lower than expected 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. While JKC entered into binding settlement agreements that resolved the outstanding claims and disputes between JKC and its client, Ichthys LNG Pty, Ltd and JKC and its consortium of subcontractors, we were required to record significant non-cash charges to equity in earnings (losses) of unconsolidated affiliates in connection with these disputes.
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 same rigorous government requirements that we are and if they are unable to comply with these requirements, in many cases, there are limited alternative subcontractors and suppliers available in the market, particularly those with the requisite security clearances. 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.
We use estimates in recognizing revenues, and if we make changes to estimates used in recognizing revenues, our profitability may be adversely affected.
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 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 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 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 projects 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 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 pricing 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, increased costs of equipment and materials from inflation or other factors 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 have in the past and may in the future 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.
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, 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.
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, 2022, the future revenues we expect to realize as a result of backlog was approximately $15.6 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.
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 segmentssegments. 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 we may be exposedfuture business combinations also depends on our ability to certain additionalintegrate the operations of the acquired businesses efficiently and effectively with our existing operations and realize the anticipated benefits from them. The potential risks resulting from these activities. These risksassociated with successful integration and realization of benefits include, but are not limited to the following:
valuation methodologies•our due diligence may not accurately capture the value proposition;identify or fully assess valuation issues, potential liabilities or other acquisition risks;
future completed•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 effectively integrated within our operations, resultingunable to recover investments in a potentially significant detriment to the associated product/service line financial results and posing additional risks to our operations as a whole;any such acquisitions;
•we may have difficulty managing our growthintegrating 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 achieve the expected growth from acquisition activities;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 and integration activities;
•we may assume liabilities of an acquired business (e.g.(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; orbenefits.
future acquisitions
International and political events 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, installA 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 maintain a numberfinancial performance. With respect to any particular country, these risks may include, but not be limited to:
•expropriation and nationalization of information technology systems both for usour assets in that country;
•changes in government regimes and other developments that may cause, directly or indirectly, political and economic instability;
•changes in trade policies affecting the markets for our customers. These activities may involve substantial risks to our ongoing business processes including,services (including but not limited to accurateretaliatory tariffs between the United States and timely customer invoicing, employee payroll processing, vendor payment processingother 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.
Internal or external cybersecurity or privacy breaches, or systems and information technology interruption or failure could adversely impact our ability to operate or expose us to significant financial losses and reputational harm.
As a U.S. government contractor and a provider of IT services operating in multiple regulated industries and geographies, we and our business partners (including our service providers, joint venture partners, suppliers and subcontractors) handle a variety of sensitive information including personally identifiable information, personnel information, protected health information, classified and controlled unclassified information, and financial reporting. If these implementationinformation, concerning our business, employees and customers. We and our business partners are continuously exposed to cyber and other security threats, including cyberattacks such as malware/computer viruses, ransomware and phishing attacks, insider threats related to malicious and non-malicious activities are not executed successfullyfrom authorized and unauthorized employees or if we encounter significant delaysthird parties, catastrophic events, power outages, natural disasters, computer system or network failures or physical break-ins. Any unauthorized electronic or physical intrusion or other security threat may jeopardize the protection of sensitive or other information stored or transmitted through our IT systems and networks and those of our business partners. This could lead to disruptions in our implementation efforts, we could experience interruptions to our business processes.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. 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, 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 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 reason 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, financial condition and reputation.
Additionally, we work with the defense industrial base industry and the U.S. government to gather and share threat intelligence and promote increased awareness and enhanced protections against cybersecurity threats. However, because of the evolving nature of these security threats, there can be no assurance that our policies, procedures and other controls will detect or prevent them, and we cannot predict their full impact. We may experience similar security threats to the IT systems that we develop, install or maintain under customer contracts, including customer contracts under which we may have access to or management responsibility for customer databases or networks that contain sensitive information relating to our customers, their employees or related third parties. Although we work cooperatively with our customers to seek to minimize the impacts of cyber and other security threats, we must usually rely on the safeguards used or required by those customers. In the event of unauthorized access to sensitive information for which we are responsible under customer contracts, our customers, their employees, or third parties may seek to hold us liable for any costs or other damages associated with the unauthorized access. In addition, government agencies may bring legal actions against us for violation of or noncompliance with regulatory requirements relating to any unauthorized access to sensitive information. Any remediation costs, damages or other liabilities related to unauthorized access of sensitive information of ours or our customers caused by cyber or other security threats may not be fully insured or indemnified by other means or our insurers. Occurrence of any unauthorized access caused by these security threats could adversely affect our reputation, business operations and impact our financial condition.results.
While we have security measures and technology in place designed to protect our and our clients’ proprietary or classified information, there can be no assurance that our efforts will prevent all threats to our computer systems. Because the techniques used to obtain unauthorized access or sabotage systems change frequently, become more sophisticated and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. As a result, we may be required to expend significant resources to protect against the threat of system disruptions and security breaches or to alleviate problems caused by these disruptions and breaches. Any of these events could damage our reputation, cause us to incur significant liability and have a material adverse effect on our business, financial condition and results of operations.
We continuously evaluate the need to upgrade and/or replace our systems and network infrastructure to protect our computing environment, to stay current on vendor supported products and to improve the efficiency of our systems and for other business reasons. The implementation of new systems and information technology could adversely impact our operations by imposing substantial capital expenditures, demands on management time and risks of delays or difficulties in transitioning to new systems. In addition, our systems implementations may not result in productivity improvements at the levels anticipated. Systems implementation disruption and any other information technology disruption, if not anticipated and appropriately mitigated, could have a material adverse effect on our business.
In addition, laws and regulations governing data privacy and the unauthorized disclosure of personal data, including the European Union General Data Protection Regulation ("GDPR"), the United Kingdom Data Protection Act, the California Consumer Privacy Act, the California Privacy Rights Act and other emerging U.S. state and global privacy laws pose increasingly complex compliance challenges and potentially elevate costs and may require changes to our business practices resulting from the variation of regulatory requirements and increased enforcement frequency. Failure to comply with these laws and regulations, including related regulatory enforcement and/or private litigation resulting from a potential privacy breach, could result in governmental investigations, significant fines and penalties, damages from private causes of action or reputational harm. Additionally, we are subject to laws, rules and regulations regarding cross-border transfers of personal data, including laws relating to transfer of personal data outside the European Economic Area. If we cannot rely on existing mechanisms for transferring personal data, we may be unable to transfer personal data of employees and clients in those regions, which could adversely affect our business, financial condition and operating results.
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, 2019,2022, we had $1.3$2.1 billion of goodwill and $495$645 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, liabilities, 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, which could have a material adverse impact on our financial condition, results of operations and cash flows.
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.
Additionally, our programs for the U.S. Government often operate for periods of time under Undefinitized Contract Actions (UCAs), which means that we begin performing our obligations before the terms, specifications or price are finally agreed to between the parties. The U.S. Government has (and has exercised in the past) the ability to unilaterally definitize contracts, which, absent a successful appeal, obligates us to perform under terms and conditions imposed by the U.S. Government. This can affect our ability to negotiate mutually agreeable contract terms and, if a contract is unilaterally imposed upon on us, it may negatively affect our expected profit and cash flows on a program or impose burdensome terms.
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 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 currently are and may be subject to additional 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. For a further discussion of goodwill impairment testing,more information, see "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" below and Note 1115 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
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.
Several of our contracts with the U.S. government are classified or subject to other security restrictions, which may limit investor insight into portions of our business.
A significant portion of our revenue is from contracts with the U.S. government that are classified or subject to security restrictions that preclude the disclosure of certain information. Additionally, a large number of our employees 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 our ability to provide information about these contracts and services, such as the scope of work, associated risks and any disputes or claims, our investors may have limited insight into a substantial portion of our business which may hinder their ability to fully evaluate the risks related to that portion of our business.
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;
•increased polarization of political parties;
•failure to pass budget appropriations, continuing funding resolutions or other budgetary decisions, including any failure of the U.S. federal government to manage its fiscal matters or to raise or further suspend the debt ceiling;
•changes, delays or cancellations of government programs or requirements;
•adoption of new laws or regulations that affect companies providing services to the governments;
•reduced buying power as a result of inflation;
•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.
Fluctuations in commodity prices may affect our customers’ investment decisions which may result in existing project cancellations or delays or changes in the timing and funding of 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. Fluctuations in oil, natural gas and commodities prices can have a direct effect on the profitability 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 customers defer new investments or cancel or delay existing projects, the demand for our services may decrease, which could have a material adverse impact on our business, financial condition and results of operations.
Risks Related to GovernmentalFinancial Conditions and Markets
Current or future economic conditions, including recession or inflation, 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 access to credit markets, including bank credit lines, letters of credit and surety bonds. Our ability to obtain capital or financing on satisfactory terms will depend in part on prevailing market conditions as well as our operating results. The lack of adequate credit or funding or the unavailability of funding on terms satisfactory to us, could have a material adverse effect on our business and financial 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.
In addition, we are subject to the risk that the lending counterparties to our Revolver 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, 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 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 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 any default not cured or waived, the lenders 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. 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.
On February 6, 2023, we amended our Senior Credit Facility (Amendment No. 8 to our Senior Credit Facility) to transition from LIBOR to SOFR. The publication of SOFR began in April 2018 and has a limited history, and the future performance of SOFR cannot be predicted based on historical performance. The future level of SOFR may bear little or no relation to the historical level of SOFR. Prior observed patterns, if any, in the behavior of market variables, such as correlations, may change in the future. While pre-publication indicative historical data has been released by the Federal Reserve Bank of New York, such analysis inherently involves assumptions, estimates and approximations. The future performance of SOFR is impossible to predict and therefore no future performance of SOFR may be inferred from any of the historical simulations or
historical performance. Hypothetical or historical performance data are not indicative of, and have no bearing on, the potential performance of SOFR.
LIBOR is expected to no longer be available after June 30, 2023 for the primary U.S. dollar LIBOR settings used by the Company. Certain of our term loans, including Term Loan B, continue to use LIBOR as a funding benchmark. The terms of 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. Any discontinuation of LIBOR and use of an alternative benchmark rate under our term loans 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.
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 $1.7 billion of indebtedness outstanding as of December 31, 2022 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 any unfunded 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, 2022, our defined benefit pension plans had an aggregate funding surplus (calculated as the excess of fair value of plan assets over the projected benefit obligations) of approximately $35 million. The largest potential source of deficit is related to our defined benefit pension plan in the U.K that is in a funding surplus position at December 31, 2022. In the future, our pension surpluses and 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 any underfunded benefit plans, our financial position could be materially and adversely affected.
Our U.K. defined benefit pension plan has had in the past, and may have in the future, 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 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.
Risks Related to Our 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 2023. 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, including sanctions and export restrictions related to Russia's invasion of Ukraine, 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 tomany 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 ("ESG") 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.
DisruptionsIn addition, standards for tracking and reporting ESG matters continue to evolve. New laws, regulations, policies and international accords relating to ESG matters, including sustainability, climate change, human capital and diversity, are being developed and formalized in Europe, the United States, Asia and elsewhere, which may entail specific, target-driven frameworks and/or disclosure requirements. Our selection of voluntary disclosure frameworks and standards, and the capital markets could also adversely affectinterpretation or application of those frameworks and standards, may change from time to time or differ from those of others, and may not be in line with any new and forthcoming related disclosure rules in the United States and abroad. Methodologies for reporting ESG data may be updated and previously reported ESG data may be adjusted to reflect improvement in availability and quality of internal and third-party data, changing assumptions, changes in the nature and scope of our clients’ ability to finance projects
operations and other changes in circumstances. Our processes and controls for reporting ESG matters across our operations and supply chain are evolving along with multiple disparate standards for identifying, measuring and reporting ESG metrics, including ESG-related disclosures that may be required by the SEC, European and other regulators, and such standards may change over time, which could result in contract cancellationssignificant revisions to our current goals, reported progress in achieving such goals or suspensions, project delaysability to achieve such goals in the future. Any failure, or perceived failure, by us to comply fully with developing interpretations of ESG laws and payment delays or defaults byregulations could harm our clients. In addition, clients may be unable to fund new projects, may choosebusiness, reputation, financial condition and operating results and require significant time and resources to make fewer capital expendituresthe necessary adjustments. If our ESG practices do not meet evolving investor or otherwise slow their spending onother stakeholder expectations and standards, then our servicesreputation 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 our attractiveness as an investment, business partner, acquirer, service provider 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 suppliersemployer 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 performanceimpacted.
Climate change 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 operational 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 operational net-zero 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 investment community considers sustainability factors in making investment decisions, and an increasing number of entities are considering sustainability factors in awarding business. The implementation of these goals and initiatives may require considerable investments, and our goals, with all of their contingencies, dependencies and in certain cases, reliance on third-party verification and/or amendments from our lenders to remedy a default. In the event of any default not cured or waived, the lendersperformance, are not obligated to provide funding or issue letters of creditcomplex and could elect to require us to apply available cash to collateralize any outstanding letters of creditambitious and
declare any outstanding borrowings, together with accrued interest may change, and other fees, to be immediately due and payable, thus requiring us to apply available cash to repay any borrowings then outstanding.we cannot guarantee that we will achieve them. 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:
| | | | | | | | | | | | | | | | |
| Location | | Owned/Leased | | | | Business Segment |
| North America: | | | | | | |
| | | | |
Location | | Owned/Leased | | Business Segment |
North America:Houston, Texas | | Leased | | | | All |
| | | | | | |
Houston, TexasFulton, Maryland | | Leased | | All | | Government Solutions |
| | | | | | |
| Columbia, Maryland | | Leased | | | | Government Solutions |
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Greenbelt, Maryland | | Leased | | Government Solutions | | |
| | | | | | |
| Lexington Park, Maryland | | Leased | | | | Government Solutions |
| | | | | | |
| Chantilly, Virginia | | Leased | | | | Government Solutions |
| | | | | | |
| Vienna, Virginia | | Leased | | | | Government Solutions |
| | | | | | |
| Fairfax, Virginia | | Leased | | | | Government Solutions |
| | | | | | |
| Dayton/Beavercreek, Ohio | | Leased | | | | Government Solutions |
| | | | | | |
| Huntsville, Alabama | | Leased | | | | Government Solutions |
| | | | | | |
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 |
| | | | |
| Europe, Middle East and Africa: | | | | | | |
| | | | | | |
| Leatherhead, United Kingdom | | Owned | | | | All |
| | | | | | |
| Glasgow, United Kingdom | | Leased | | | | Government Solutions |
| | | | | | |
| Wiltshire, United Kingdom | | Leased / Owned | | | | Government Solutions |
| | | | | | |
| Al Khobar, Saudi Arabia | | Leased | | Energy | | Sustainable Technology Solutions |
| | | | | | |
| Asia-Pacific: | | | | | | |
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| Chennai, India | | Leased | | | | All |
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| Majura Park, Australia | | Leased | | | | Government Solutions |
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| | | | | | |
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| Delhi (Gurgaon), India | | Leased | | | | Sustainable Technology Solutions |
| | | | | | |
Perth, Australia | | Leased | | Energy Solutions | | |
| | | | | | |
| Brisbane, Australia | | Leased | | Energy | | Government Solutions |
| | | | | | |
Sydney, Australia | | Leased | | Energy Solutions | | |
| | | | | | |
| Sydney, Australia | | Leased | | | | Government Solutions |
| | | | | | |
| 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, 2022 and 2021, 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 10, 2023, the Board of Directors declared a dividend of $0.135 per share, which will be paid on April 14, 2023.
At January 31, 2020,2023, there were 7664 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 plan to repurchase up to $350 million of our outstanding shares of common stock, which replaced and terminated the August 26, 2011 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 remained available for repurchase under this authorization.
On October 18, 2022, the Board of Directors authorized an increase of approximately $420 million to our share repurchase program, increasing the authorization level to $500 million. As of December 31, 2022, $451 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, 2019,2022, and the amount available to be repurchased under the authorized share repurchase program:
|
| | | | | | | | | | | | | |
| 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2022 | 1,160,197 | | | $ | 46.82 | | | 1,160,197 | | | $ | 475,074,729 | |
| November 1 - 30, 2022 | 457,660 | | | $ | 50.48 | | | 451,938 | | | $ | 452,257,517 | |
| December 1 - 31, 2022 | 30,143 | | | $ | 51.48 | | | 21,046 | | | $ | 451,171,009 | |
| Total | 1,648,000 | | | $ | — | | | 1,633,181 | | | $ | 451,171,009 | |
| |
(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. |
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, 2019,2022, with the cumulative total return on the Dow Jones Heavy Construction IndustryS&P 1500 IT Consulting & Other Services Index, the Russell 1000 Index, the Russell 2000 Index, and the S&P 1500 IT Consulting & Other ServicesMidCap 400 Index and the Dow Jones Heavy Construction Industry Index for the same period. The comparisons assume the investment of $100 on December 31, 20142017 and reinvestment of all dividends. The shareholder return is not necessarily indicative of future performance.
In our Annual Report on Form 10-K for the 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 of the S&P 1500 IT Consulting & Other Services Index provides a balanced view of the performance of our business. Additionally, as KBR’s stockKBR is now included asno longer a constituent of the Russell 2000 Index, we believe itindex and is now a better independent broad market index, because it measures the performanceconstituent 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 plan to includeindex, the comparison toRussell 2000 index will be removed from this performance graph and will be replaced by the Russell 1000 index in future filings.going forward.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 12/31/2017 | | 12/31/2018 | | 12/31/2019 | | 12/30/2020 | | 12/31/2021 | | 12/31/2022 |
| KBR | $ | 100.00 | | | $ | 77.96 | | | $ | 158.74 | | | $ | 163.76 | | | $ | 254.92 | | | $ | 285.35 | |
| S&P 1500 IT Consulting & Other Services | $ | 100.00 | | | $ | 85.45 | | | $ | 111.27 | | | $ | 126.23 | | | $ | 174.12 | | | $ | 133.03 | |
| Russell 1000 | $ | 100.00 | | | $ | 95.22 | | | $ | 125.14 | | | $ | 151.37 | | | $ | 191.42 | | | $ | 154.80 | |
| Russell 2000 | $ | 100.00 | | | $ | 88.99 | | | $ | 111.70 | | | $ | 134.00 | | | $ | 153.85 | | | $ | 122.41 | |
| S&P MidCap 400 | $ | 100.00 | | | $ | 88.92 | | | $ | 112.21 | | | $ | 127.54 | | | $ | 159.12 | | | $ | 138.34 | |
| Dow Jones Heavy Construction | $ | 100.00 | | | $ | 73.89 | | | $ | 99.12 | | | $ | 120.35 | | | $ | 180.21 | | | $ | 207.33 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
|
| S&P 1500 IT Consulting & Other Services | $ | 100.00 |
| | $ | 97.05 |
| | $ | 112.10 |
| | $ | 125.20 |
| | $ | 104.40 |
| | $ | 132.67 |
|
| Russell 2000 | $ | 100.00 |
| | $ | 94.29 |
| | $ | 112.65 |
| | $ | 127.46 |
| | $ | 111.94 |
| | $ | 138.50 |
|
| 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 |
|
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. |
| | | | | | | | | | | | | | | | | | | | |
| | | 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.
|
| |
(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 of this Annual Report on Form 10-K.
Company Overview
KBR Inc., a Delaware corporation ("KBR"), delivers science, technology, engineering and logistics support 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; C5ISR; 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
•Sustainable decarbonization solutions that accelerate and enable energy transition and climate change solutions such as proprietary, sustainability-focused process licensing; advisory services focused on energy transition; high-end engineering, design and management program offerings; and digitally-enabled asset optimization solutions.
KBR's strategic growth vectors include:
•Defense modernization;
•Space superiority;
•Health and human performance;
•Sustainable technology;
•High-end engineering;
•Energy transition and security; and
•Technology-led asset optimization
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. MoD, 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 technologies that are disruptive, innovative and sustainability- and safety-focused. These technologies and engineering 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.
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 defense, renewable energy and critical infrastructure sectors primarily in the U.K. and Australia.
On August 2, 2022, we acquired VIMA Group ("VIMA"), a U.K. based leading provider of digital transformation solutions to defense and other public sector clients. VIMA delivers solutions across a number of large-scale, high priority digital transformation programs to support its clients in ensuring availability of effective digital and information technology as guided by the U.K.'s Digital Strategy for Defence. The company is a trusted advisor and a top five supplier to Defence Digital and Navy Digital – both organizations within the UK MoD with several highly strategic, fast-growing programs.
Additional information relating to the Centauri, Frazer-Nash and VIMA acquisitions is described in Part II of this Annual Report on Form 10-K in Note 4 to our consolidated financial statements.
Our Business Segments
KBR's business is organized into two core business segments and one non-core business segment as follows:
Core business segments
•Government Solutions
•Sustainable Technology Solutions
Non-core business segment
•Other
See additional information on our business segments in Note 2 to our consolidated financial statements and under "Item 1. Business" in this Annual Report on Form 10-K.
This MD&A does not address certain items in respect of the year ended December 31, 2017 in reliance on amendments to disclosure requirements adopted by the SEC in 2019. A discussionBusiness Environment and analysis of such period may be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 26, 2019.Trends
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 OverviewOutlook
InOn December 2019, the fiscal year 2020 U.S. defense budget was29, 2022, President Biden signed into law authorizing $738the $1.7 trillion Consolidated Appropriations Act of 2023, which included $858 billion in defense spending, of funding.which $817 billion is for the DoD, and $773 billion for non-defense discretionary spending which represents an increase from the fiscal 2022 budget of 10% and 6%, respectively. The U.S. defense spending 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, continues the restoration of military readiness and increases support for the U.S. European Command. The budget includes a number ofseveral measures to strengthen emerging technologies including cyber-science and technologies, artificial intelligence, hypersonic capabilities,directed energy, hypersonics and emerging biotechnologies. The non-defense discretionary spending proposal includes $25 billion, or a 6% increase from the fiscal 2022 budget, in funding for NASA to support the continuation of scientific research, exploration and space technology, as well as increased funding across all agencies to address the climate crisis. However, uncertainty continues to exist regarding the raising of the debt ceiling. The current statutory limit was reached in January 2023, requiring the Treasury Department to take extraordinary measures to continue financing U.S. government obligations while avoiding exceeding the debt ceiling. It is expected, however, the U.S. government will exhaust these measures by June 2023. If the debt ceiling is not raised, the U.S. government may not be able to fulfill its funding obligations and there could be significant disruption to all discretionary programs and wider financial and economic repercussions. The federal budget and debt ceiling are expected to continue to be the subject of considerable congressional debate. Although we believe DoD programs will continue to receive consensus support for increased funding and would likely receive priority if this scenario came to fruition, the effect on individual programs or KBR cannot be predicted at this time.
Internationally, our government servicesGovernment Solutions work is performed primarily for the U.K. Ministry of DefenceMoD and the Australian Department of Defence. A significant majority of our work inIn November 2022, the U.K. is contracted through long-term private financed initiatives that are expectedgovernment announced its intent to provide stable, predictable earningsmaintain its budget to at least 2% of GDP. Recognizing the importance of strong defense and cash flow over the program life. Our largest PFI extends through 2041.role the U.K. plays across the globe, the U.K. has prioritized investment in military research and investment in key areas to advance and 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 October 2022, the Australian government announced that Australia's defense spending for the 2022 - 2023 financial year will increase by 7.8% to AUD 48.7 billion, or 1.96% of GDP.
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 the exclusive household goods move
management service provider for the U.S. Armed Forces, U.S. DoD civilians and their families. Under this contract, HomeSafe plans to modernize and infuse technology to improve the global relocation experience for all military personnel and their families. In October 2022, the award was upheld in the Court of Federal Claims, and the period for appeal of the Court's decision has expired. Subsequent to the Court of Federal Claims ruling, U.S. Transportation Command lifted the stop work order on the contract in November 2022 and KBR is proceeding with work under the award.
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, expanding global development and an acceleration of demand for energy transition, renewable energy sources and climate change solutions. The globe is in search of the solution to the energy trilemma, the balance between energy affordability, ensuring energy security and achieving environmental sustainability. Clients are prioritizing their efforts to solve the energy trilemma by investing in digital solutions to optimize operations, increase end-product flexibility and energy efficiency, reduce unplanned downtime and minimize environmental footprint. As the global focus on energy security intensifies and companies continue to drive best value selectionscommit to near-term carbon neutrality and customer confidencelonger-range net-zero carbon emissions, we expect spending to continue in areas such as decarbonization; carbon capture, utilization and sequestration; biofuels; and circular economy. Further, leading companies across the enterprise that we have built through our strategic acquisitionsworld are proactively evaluating clean energy alternatives, including hydrogen and organic growth.
Hydrocarbons Market Overview
In the hydrocarbons market, demand for ourgreen ammonia which complements KBR's proprietary process technologies, solutions and services is highly correlatedcapabilities.
We expect climate change and energy transition to continue to be areas of priority and investment as many countries, including the level of capitalU.S., look to boost their economies and operating expenditures of our customersinvest in a cleaner future. Specifically, on August 16, 2022, the President signed the Inflation Reduction Act into law which includes provisions intended to, among other things, incentivize domestic clean energy, manufacturing and prevailing market conditions. Recent volatility in commodity prices has resulted in many hydrocarbons companies taking steps to defer or suspend capital expenditures, resulting in delayed or reduced volumes of business across the sector. Robust 2019 bookings and our large proportion of O&M funded services will provide stability during this period of market softness.production.
From conceptual development studies to project delivery and asset management services, we seek to collaborate with our customers to meet the demands of the global economy.
Overall,In response to Russia's military invasion of Ukraine, we believe we havecontinue to carry out efforts to wind down operations in Russia in a balanced portfolioresponsible manner. We expect that the reconfiguration of global professional services, program deliverysupply and technologies acrossdemand stemming from expanding sanctions on Russia will result in near and mid-term investments to enable energy, chemical and food production security globally.
In June 2022, we announced that we entered into an agreement to invest an additional £80 million in Mura Technology ("Mura") that will bring KBR's aggregate investment in Mura to approximately 18.5%. This investment provides Mura incremental capital to accelerate development of its plastics recycling projects and enables KBR to participate more fully in this sustainability-focused, high growth sector. Funding will be in two tranches with 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 disciplinedfirst payment made in our pursuit of EPC projects across hydrocarbons market sectors.
Our business is organized into three core and two non-core business segments supporting the government services and hydrocarbons markets as follows:
Core business segments
Government Solutions
Technology Solutions
Energy Solutions
Non-core business segments
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 SeptemberJune 30, 2019,2022 and the remainder in Notes2023. With a strategic approach to commercializing and scaling its proprietary, differentiated plastics recycling solution, Mura is well positioned for profitable growth and value creation as the plastics circular economy develops and matures.
Additionally, in May 2022, KBR's joint venture with Zachry Group, KZJV, was issued a full notice to proceed with Phase 1 of Plaquemines LNG. KZJV, in which KBR holds a non-majority interest, will integrate highly modularized, owner-furnished equipment for the 13.3 million tonnes per annum (MTPA) nameplate facility. KBR will provide project management, engineering, program integration and 2interface management and commissioning support under an innovative commercial structure that promotes collaboration and enhances overall program performance.
Change in Fiscal Year End
On December 13, 2022, the Board of Directors approved a change in the fiscal year end from a calendar year ending on December 31 to a 52 – 53 week year ending on the Friday closest to December 31, effective beginning with fiscal year 2023. The Company is making the fiscal year change on a prospective basis and will not adjust operating results for prior periods. The change to our consolidated financial statementsfiscal year will not impact our results for the year ended December 31, 2022. While the change will impact the prior year comparability of each of the fiscal quarters and under "Item 1. Business"the annual period in 2023, we do not expect the impact to be material. The Company believes this Annual Report on Form 10-K.change will improve comparability between periods by eliminating the year-over-year variability in calendar month productive days and provide a more consistent reporting cadence for operational leaders to aid in strategic decision making.
Overview of 2022 Financial Results and Significant Bookings
2022 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, energy transition, energy security and high-end engineering and a truly global client base. Together, these attributes distinguish KBR and have contributed directly to the Company’s growth in earnings during the year. Although we experienced significantly reduced volume from the OAW program in 2022 compared to 2021, GS delivered increased profitability attributed to increased activity in 2022 to support exercises, training and other activities of the European Command and the acquisition of Frazer-Nash, and STS delivered significantly increased 2022 earnings growth. Our teams continued to deliver operational performance, healthy profitability and strong financial results in 2019 with each operating segment contributing across our key financial metrics: revenue growth, operating income, operating 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 includingand technology advances, developments and investments, such as our commitment to invest an additional £80 million in Mura Technology for which we have already contributed £48 million in 2022 with the U.S. DoD Preservationsecond payment expected to be paid in early 2023. These accomplishments have assisted us in continuing our track record of innovation, bringing new technologies to market and advising, consulting and delivering expertise in the vital area of energy transition, energy security, hydrogen future and plastics circular economy. We progressed in our strategic journey to advance upmarket to deliver digital transformation solutions by completing the VIMA acquisition. Additionally, KZJV received a full notice to proceed on Phase 1 of Plaquemines LNG in which KBR will provide project management, engineering, program integration and interface management and commissioning support. In October 2022, we prevailed in the Court of Federal Claims bid protest actions and, as such, our HomeSafe joint venture is moving forward with transition work. Lastly, we entered into a settlement agreement to resolve outstanding claims and disputes between JKC and the consortium of subcontractors of the Force & Family program,Combined Cycle Power Plant.
Our GS business landed new awards, including a $640 million ceiling, 5-year ground systems and mission operations contract to support more than 10 NASA missions, including continued efforts on the NASA Launch Range Operations Contract for Wallops Flight Facility, and several cost-reimbursable EPC projects in our Energy Solutions business. Our U.S. Government Solutions business postedJames Webb Space Telescope; a recompete win rate above 95% that included$229 million task order as a part of the 8-year Marine Corps preposition stock program,Axiom team to build the 5-year NAVAIR Aircrewnext generation astronaut spacesuits to support the Artemis lunar missions as a part of NASA's 10 year Exploration Extravehicular Activity 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("xEVAS") contract with a potential value of $3.5 billion across the chemical, petrochemicallife of the program; and refining markets as well as increased bundling of technology licenses with ancillary services, proprietary equipment and catalyst. Our acquisition of SGT in April 2018 also contributeda $4.8 billion ceiling multiple-award to our 2019 growth.
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, 2021 and 2020 is included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 22, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated Results |
| Years Ended December 31, | | Change |
| | | | | | | 2022 vs. 2021 | | 2021 vs. 2020 |
| Dollars in millions | 2022 | | 2021 (1) | | 2020 (1) | | $ | | % | | $ | | % |
| Revenues | $ | 6,564 | | | $ | 7,339 | | | $ | 5,767 | | | $ | (775) | | | (11) | % | | $ | 1,572 | | | 27 | % |
| Cost of revenues | $ | (5,736) | | | $ | (6,533) | | | $ | (5,101) | | | $ | (797) | | | (12) | % | | $ | 1,432 | | | 28 | % |
| Gross profit | $ | 828 | | | $ | 806 | | | $ | 666 | | | $ | 22 | | | 3 | % | | $ | 140 | | | 21 | % |
| Equity in earnings (losses) of unconsolidated affiliates | $ | (80) | | | $ | (170) | | | $ | 30 | | | $ | 90 | | | 53 | % | | $ | (200) | | | n/m |
| Selling, general and administrative expenses | $ | (420) | | | $ | (393) | | | $ | (335) | | | $ | 27 | | | 7 | % | | $ | 58 | | | 17 | % |
| Acquisition and integration related costs | $ | (2) | | | $ | (12) | | | $ | (9) | | | $ | (10) | | | (83) | % | | $ | 3 | | | 33 | % |
| Gain on disposition of assets and investments | $ | 19 | | | $ | 2 | | | $ | 18 | | | $ | 17 | | | n/m | | $ | (16) | | | 89 | % |
| Goodwill impairment | $ | — | | | $ | — | | | $ | (99) | | | $ | — | | | n/m | | $ | (99) | | | (100) | % |
| Restructuring charges, asset impairments and other | $ | (2) | | | $ | (2) | | | $ | (214) | | | $ | — | | | — | % | | $ | (212) | | | (99) | % |
| Operating income | $ | 343 | | | $ | 231 | | | $ | 57 | | | $ | 112 | | | 48 | % | | $ | 174 | | | 305 | % |
| Interest expense | $ | (87) | | | $ | (80) | | | $ | (72) | | | $ | 7 | | | 9 | % | | $ | 8 | | | 11 | % |
| Unrealized gain on other investment | $ | 16 | | | $ | 4 | | | $ | — | | | $ | 12 | | | 300 | % | | $ | 4 | | | n/m |
| Other non-operating income (expense) | $ | 12 | | | $ | (9) | | | $ | 1 | | | $ | 21 | | | n/m | | $ | (10) | | | n/m |
| Income (loss) before income taxes | $ | 284 | | | $ | 146 | | | $ | (14) | | | $ | 138 | | | 95 | % | | $ | 160 | | | n/m |
| Provision for income taxes | $ | (92) | | | $ | (111) | | | $ | (28) | | | $ | (19) | | | (17) | % | | $ | 83 | | | 296 | % |
| Net income (loss) | $ | 192 | | | $ | 35 | | | $ | (42) | | | $ | 157 | | | 449 | % | | $ | 77 | | | 183 | % |
| Net income attributable to noncontrolling interests | $ | 2 | | | $ | 8 | | | $ | 21 | | | $ | (6) | | | (75) | % | | $ | (13) | | | (62) | % |
| Net income (loss) attributable to KBR | $ | 190 | | | $ | 27 | | | $ | (63) | | | $ | 163 | | | 604 | % | | $ | 90 | | | 143 | % |
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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. 2018n/m - not meaningful
Revenues. Revenues decreased by $775 million, or 11%, to $6.6 billion in 2022, compared to $7.3 billion in 2021. The increase in consolidated revenues in 2019decrease was primarily driven byattributable to reduced revenues of approximately $1.3 billion from the continued strong organic growth within our GS logisticscompletion of contingency work associated with the OAW program in early 2022 that commenced in August 2021 and engineering businesses primarily on U.S. government contracts as well as increased revenues from SGT acquired in April 2018. New services and consulting awardsreduced activity in the Middle East from our ES business segment and higher proprietary equipment sales volume from our TS business segment also contributed significantly to consolidated revenue growthassociated with the U.S. DoD's exit in 2019.
2018 vs. 2017
The increase in consolidated revenues in 2018early 2021. Additionally, the decrease was primarily driven by strong organic growth withinthe non-cash impact of our GS logistics and engineering services business areas, the consolidation of the Aspire Defence subcontracting entities and acquisition of SGT (as discussedefforts to continue winding down operations in Note 4 to our consolidated financial statements), and increased revenues from our TS segment. The increase was partially offset by decreased revenueRussia in our ES segment caused by reduced activity2022, and the completion or near completion of several projects we strategically exited in 2020. This decrease was offset by increased activity in 2022 to support exercises, training and other activities of the U.S.European Command, the acquisition of Frazer-Nash in October 2021 and Canada, the non-recurrence of $35 million in revenue from the PEMEX settlement that occurred in 2017, and decreasedincreased revenues in our Non-strategic Business segment as we exit those businesses.STS primarily from engineering and professional services and technology sales.
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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
Gross profit. The $69$22 million increase in gross profit in 2019 includes $80 million in increased gross profit from our GS business segmentwas 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 related to the Aspire Defence projectincreased 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 to lower margins on several major EPC projectsEuropean Command, as described above, and the non-recurrence of several favorable items including the recognition of variable consideration associated with the successful completion of an LNG project in Australia occurring in 2018.
2018 vs. 2017
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 profitFrazer-Nash in October 2021. We also benefited from our TS segment.lower amortization of intangible assets in 2022 from the Centauri acquisition. These increases were partially offset by decreased gross profit attributable to reduced volume in 2022 from OAW and reduced activity in the Middle East associated with the U.S. DoD's exit in early 2021, as described above, and a net favorable resolution of legacy matters in our ES segment dueSTS business in 2021 that did not recur in 2022.
Equity in earnings (losses) of unconsolidated affiliates. Equity in earnings (losses) of unconsolidated affiliates increased by $90 million, or 53%, from a loss of $170 million in 2021 compared to overall reduced activitya loss of $80 million in 2022. During 2021, a non-cash charge of $203 million was recorded associated with the settlement agreement between JKC and its client, Ichthys LNG Pty, Ltd, compared to a $137 million non-cash charge recorded during 2022 relating to the non-recurrencesettlement agreement with the consortium of subcontractors of the 2017 PEMEX settlement.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 decreaseCombined Cycle Power Plant. Additionally, the reduction in loss is attributed to equity in earnings from commencement of unconsolidated affiliates in 2019 was primarily due to the substantial completion of a North Sea oil project and an unfavorable arbitration ruling in early 2019 associated with a subcontractor on the Ichthys LNG project. We also recognized an impairment of an equity method investment in Latin America in 2019 and the non-recurrence of the release of a tax liabilityservices 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
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 venturesproject in the U.S. and a project specific joint venturesecond quarter of 2022. These reductions in Europe. These increaseslosses were partially offset by the consolidation of the Aspire Defence subcontracting entities which moved results to gross profit, decreased earningsa charge on our Affinity joint venture, reduced activity from a joint venture acquired as part of a historical GS acquisition in Latin America,2022.
Selling, general and decreased earnings on the Ichthys LNG project due to delays in the estimated completion date.
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| | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling, General and Administrative Expenses | | | | | | | |
| | | | | | 2019 vs. 2018 | | | | 2018 vs. 2017 |
| Dollars in millions | 2019 | | 2018 | | $ | | % | | 2017 | | $ | | % |
| Selling, general and administrative expenses | $ | (341 | ) | | $ | (294 | ) | | $ | 47 |
| | 16 | % | | $ | (244 | ) | | $ | 50 |
| | 20 | % |
2019 vs. 2018
The increase in 2019 of $47 million in selling,administrative expenses. Selling, general and administrative expenses aswere $27 million higher in 2022 compared to 20182021, which was primarily related to an increasedriven by growth in corporate costs including increased IT, rebrandingthe core business, incremental expenses from the Frazer-Nash business and other general corporate expenses.initiatives.
2018 vs. 2017
The increaseAcquisition and Integration Related Costs. Acquisition and integration related costs in selling, general2021 were primarily comprised of costs associated with our acquisition and administrative expensesintegration of Centauri in 2018 wasOctober 2020 and Frazer-Nash in October 2021. Acquisition and integration costs in 2022 are primarily due to increased expenses related to the acquisition of SGT acquiredVIMA in early 2018August 2022.
Gain on Disposition of Assets and organic growth in our GS business segment.
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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
Investments.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 in 2018 was primarily due to $5 million of incremental costs related to the acquisition of SGT and approximately $2 million related to the consolidation of the Aspire subcontracting entities.
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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
The2022 gain on disposition of assets and investments was primarily driven by a gain of $16 million from the sale of our investment interest in 2019 primarily reflectsthree U.K. Road investments and a gain of $5 million for the gain on sale of a U.S. government contract vehicle and sale of an equity method investment related to a roads projectproperty in Ireland within our GS Business segment. Additionally, we recognizedbusiness offset by a gain as a result of the liquidation of several legal entities.
2018 vs. 2017
The loss on disposition of assets in 2018 primarily reflects the loss on sale of one$3 million of our unconsolidated affiliates within the ES Business segment.a joint venture that was acquired as a part of a historical GS acquisition.
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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
Interest Expense. The increase in interest expense in 2019 was primarily duedriven by increases in the U.S. federal reserve funds rate in 2022.
Unrealized Gain on Other Investment. The unrealized gain on other investment in 2022 is related to increased fixed-rate borrowingsthe appreciation in the value of our Mura Technology investment as a result of revaluations triggered by the Convertible Notesobservable transactions associated with our additional investment and investments from other third parties. In 2021, the gain is related to the appreciation in November 2018 partially offset by lower outstanding borrowings and weighted-average interest rates onthe value of our variable-rate debt. See Note 14 to our consolidated financial statements for further discussion.
2018 vs. 2017
The increase in interest expense in 2018 compared to 2017 was primarily due to increased borrowingsMura Technology investment as a result of the SGT and Aspire acquisitions and increased capitaladditional 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.from other third parties.
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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). Other non-operating income (expense) includes interest income, foreign exchange gains and losses and other non-operating income or expense items. The net increase is primarily driven by foreign exchange gains and losses. In 2022, we recorded approximately $8 million in other non-operating income wasnet foreign exchanges gains primarily duerelated to foreign exchange impacts from the Australian dollar tranche of Term Loan A that has since been redenominated into U.S. dollars following the execution of an amendment to our existing Credit Agreement in the fourth quarter of 2022. In 2021, we recorded approximately $8 million in net losses related to the impactchanges in fair values of favorable foreign currency movements on intercompanyour balance positions denominated in U.S. dollars partiallysheet hedges offset by unfavorable variances on certain U.S. dollar cash positions held primarily in Australia.remeasurement of our balance sheet positions.
2018 vs. 2017
Provision for income taxes. The decrease in other non-operating income (loss) from 2017 to 2018 was primarily due to an increasethe provision for incomes taxes 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 20192022 compared to 20182021 was primarily driven by the absencenon-deductibility of losses incurred with respect to the gainsettlement of $108 millionoutstanding matters related to the Ichthys LNG project to which KBR is a joint venture partner. Additionally, the decrease is attributable to a tax benefit recognized in 2018 as a result of obtaining control of the Aspire Defence project subcontracting joint ventures.
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, 20182022 associated with research and 2017 to the U.S. statutory federal rate and further information on the effects of the Tax Act is presented indevelopment credits. See Note 1513 to our consolidated financial statements.statements for further discussion on income taxes.
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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 | % |
Net income attributable to noncontrolling interests. The decrease in net income attributable to noncontrolling interests in 2019 was primarily due to the non-recurrence of the recognition of variable consideration associated with the successful completion and performance testing ofdriven by decreased income from a major ES projectMiddle East joint venture project in Australiaour STS business segment that was sold in 2018, executed by a consolidated joint venture.the third quarter of 2021.
Results of Operations by Business Segment
We analyze the financial results for each of our threetwo core business segments as well as ourand one non-core segments.business segment. 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 | % |
| | | | | | | | | | | | | | |
| 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 | )% |
| | | | | | | | | | | | | | |
| (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 |
|
| | | | | | | | | | | | | | |
| Total operating income (loss) | $ | 362 |
| | $ | 468 |
| | $ | (106 | ) | | (23 | )% | | $ | 264 |
| | $ | 204 |
| | 77 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | Change |
| | | | | | | 2022 vs. 2021 | | 2021 vs. 2020 |
| Dollars in millions | 2022 | | 2021 | | 2020 | | $ | | % | | $ | | % |
| Revenues | | | | | | | | | | | |
| Government Solutions | $ | 5,320 | | | $ | 6,149 | | | $ | 4,055 | | | $ | (829) | | | (13) | % | | $ | 2,094 | | | 52 | % |
| Sustainable Technology Solutions | 1,244 | | | 1,190 | | | 1,712 | | | 54 | | | 5 | % | | (522) | | | (30) | % |
| Total revenues | $ | 6,564 | | | $ | 7,339 | | | $ | 5,767 | | | $ | (775) | | | (11) | % | | $ | 1,572 | | | 27 | % |
| | | | | | | | | | | | | |
| Operating income | | | | | | | | | | | | | |
| Government Solutions | $ | 441 | | | $ | 414 | | | $ | 355 | | | $ | 27 | | | 7 | % | | $ | 59 | | | 17 | % |
| Sustainable Technology Solutions | 47 | | | (30) | | | (77) | | | 77 | | | n/m | | 47 | | | 61 | % |
| Other | (145) | | | (153) | | | (221) | | | 8 | | | 5 | % | | 68 | | | 31 | % |
| Operating income | $ | 343 | | | $ | 231 | | | $ | 57 | | | $ | 112 | | | 48 | % | | $ | 174 | | | 305 | % |
n/m - not meaningful
Government Solutions
2019 vs. 2018
GS revenues increaseddecreased by $468$829 million, or 14%13%, to $3.9$5.3 billion in 2019,2022 compared to $3.5$6.1 billion in 2018. This increase was2021. The decrease is primarily driven by strong growth within our GS business from new and existing U.S. government contracts including increased volumes for disaster recovery services providedattributable 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. GSreduced revenues of approximately $1.3 billion from the April 2018 acquisitioncompletion of SGT increased by approximately $139 millioncontingency work associated with the OAW program in 2019 on a year-over-year basis. A new award from the U.K. MoD for servicesearly 2022 that commenced in August 2021 and reduced activity in the Middle East also contributedassociated with the U.S. DoD's exit in early 2021. This decrease was offset by increased activity in 2022 to support exercises, training and other activities of the increaseEuropean Command and the acquisition of Frazer-Nash in revenues in 2019.October 2021.
GS gross profitoperating income increased by $80$27 million, or 23%7%, to $430$441 million in 2019,2022, compared to $350$414 million in 2018. 2021. The increase is primarily driven by items discussed above, lower amortization of intangibles from the Centauri acquisition, favorable project close out of an international GS project and net gains from sales of investments completed in 2022. These increases were partially offset by a charge on a joint venture acquired as part of a historical GS acquisition that was divested in the fourth quarter of 2022.
Sustainable Technology Solutions
The increase in 2019 was primarily due to the increased volumes on U.S. government contracts and the full yearSTS revenues of operations from SGT. In addition, we received a favorable judgment to close out the private security legal matter and settled several other 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.
GS equity in earnings in unconsolidated affiliates decreased by $3$54 million, or 9%5%, from 2021 to $29 million in 2019, compared to $32 million in 2018. The decrease2022 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 million to gross profit.
GS equity 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 resultingrevenues from a less favorable mix of licensetechnology sales 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,engineering 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 ofprofessional 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 earningsa $15 million non-cash impact of our continued efforts to wind down operations in 2019 resulting from the ramp upRussia in 2022, timing of newcertain STS 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 that we strategically exited in 2020.
STS operating income increased by $77 million from 2021 to 2022. The increase in operating income is primarily driven by increased revenues from technology sales and engineering and professional services and a decrease in equity in losses related to the Ichthys LNG project. During 2021, a non-cash charge of $203 million was recorded for the settlement agreement between JKC and its client, Ichthys LNG Pty, Ltd, compared to a $137 million non-cash charge recorded during 2022 for the settlement agreement with the consortium of subcontractors of the Combined Cycle Power Plant. The increase is also attributed to equity in earnings from commencement of services on an LNG project in the U.S. and Canada, and the non-recurrencesecond quarter of $35 million in revenue from the PEMEX settlement in 2017.2022. These decreases wereincreases are partially offset by new winsa $22 million non-cash impact of our continued efforts to wind down operations in Russia and growth on existing projects and the recognitiona net favorable resolution of variable consideration associated with the successful completion and performance testing of a major ES project.legacy matters in our STS business in 2021 that did not recur in 2022.
ES gross profit
Other
Other operating loss decreased by $19$8 million, or 12%5%, to $134145 million in 2018,2022, 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 a2021. The decrease in earnings on the Ichthys LNG project dueoperating loss is primarily attributed to an EAC increasedecreased acquisition and schedule prolongation.
Non-strategic Business
2019 vs. 2018
Non-strategic Business generated revenues of $1 million in 2019 compared to $2 million in 2018. Revenues in the Non-strategic Business were primarily 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 completed project in the U.S, compared to a gross loss of $6 million in 2018 primarily due to the settlement of a legacy legal matter.
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 our consolidated and 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$3.9 billion and $3.0$2.6 billion at December 31, 20192022 and 2018,2021, respectively. OurAs a result of our continued efforts to wind down operations in Russia, ending STS backlog included in the table below for projects related to consolidated joint ventures with noncontrolling interests includes 100%was reduced by $47 million as of the backlog associated with those joint ventures and totaled $5.3 billion at both December 31, 2019 and 2018.2022. Additionally, as a result of U.S. Transportation Command lifting the stop work order on the HomeSafe contract in November 2022, we have booked $39 million in backlog as of December 31, 2022 for our transition work.
The following table summarizes our backlog by business segment for the years ended December 31, 20192022 and December 31, 2018,2021, respectively:
| | | | | | | | | | | |
| Dollars in millions | December 31, 2022 | | December 31, 2021 |
| Government Solutions | $ | 11,543 | | | $ | 12,628 | |
| Sustainable Technology Solutions | 4,012 | | | 2,345 | |
| Total backlog | $ | 15,555 | | | $ | 14,973 | |
|
| | | | | | | |
| 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%2022, 36% of our backlog will be executed within one year. Of this amount, 88%77% will be recognized as revenuein revenues on our consolidated statement of operations and 12%23% will be recorded by our unconsolidated joint ventures. As of December 31, 2019, $682022, $98 million of our backlog relates to active contracts that are in a loss position.
As of December 31, 2019,2022, 11% of our backlog was attributable to fixed-price contracts, 50%40% was attributable to PFIs, and 39%24% was attributable to cost-reimbursable contracts and 25% 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, $9.22022, $8.3 billion of our GS backlog was currently funded by our customers.
As of December 31, 2019,2022, we had approximately $2.8$4.2 billion of priced option periods not yet exercised by the customer for U.S. government contracts that are not included in the backlog amounts presented above.
The difference between backlog of $14.6$15.6 billion and the remaining performance obligationobligations as defined by ASC 606 of $11.4$11.2 billion is primarily due to our proportionate share of backlog related to unconsolidated joint ventures which is not included in our remaining performance obligation.obligations. 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 cash equivalents, cash generated from operations, our Senior Credit Facility (as defined below) 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 phasesadvance on certain of our larger fixed-price projects,sustainable 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.
ESCertain STS 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 PLOCthe Revolver (as defined below) 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 December 30, 2022, we entered into Amendment No. 7 under our existing Credit Agreement, dated as of April 25, 2018, 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 ("Senior Credit Facility"). Amendment No. 7 replaces the Australian dollar tranche of Term Loan A with new term loans in an aggregate principal amount of $99 million ("2022 Refinancing Term Loan A tranche") after deducting estimated deferred financing fees and foreign exchange conversion. The amendment redenominates the original loans in the Australian dollar tranche from Australian dollars into U.S. dollars and establishes SOFR as the reference borrowing rate for such loans. Additionally, on February 6, 2023, we entered into Amendment No. 8 under our existing Credit Agreement, dated as of April 25, 2018, to replace the LIBOR-based reference borrowing rate with a SOFR-based reference borrowing rate for the U.S. dollar tranche of Term Loan A and the Revolving Credit Loans under our existing Credit Agreement.
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, 2019,2022, we were in compliance with all financial covenants related to our debt agreements.
Cash and cash equivalents totaled $712$389 million at December 31, 20192022 and $739$370 million at December 31, 20182021 and consisted of the following:
| | | | | | | | | | | |
| | December 31, |
| Dollars in millions | 2022 | | 2021 |
| Domestic U.S. cash | $ | 27 | | | $ | 34 | |
| International cash | 255 | | | 220 | |
| Joint venture and Aspire Defence project cash | 107 | | | 116 | |
| Total | $ | 389 | | | $ | 370 | |
|
| | | | | | | |
| | 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 has determined that $70 million of undistributed earnings is available for future repatriation of cash for deployment in the U.S.India. Accordingly, we have recorded the income tax expense expected withwhich was less than $2 million. In addition, we changed our permanent reinvestment assertion on all current and future earnings in our subsidiaries in Saudi Arabia. The associated income tax expense is and will be reflected in the future repatriation.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.
As of December 31, 2019,2022, 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 | | 2022 | | 2021 | | 2020 |
| Cash flows provided by operating activities | | $ | 396 | | | $ | 278 | | | $ | 367 | |
| Cash flows used in investing activities | | 37 | | | (428) | | | (877) | |
| Cash flows provided by (used in) financing activities | | (399) | | | 87 | | | 225 | |
| Effect of exchange rate changes on cash | | (15) | | | (3) | | | 9 | |
| Increase (decrease) in cash and cash equivalents | | $ | 19 | | | $ | (66) | | | $ | (276) | |
|
| | | | | | | | | | | | |
| | | 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 Activitiesactivities. Cash provided by operations totaled $396 million and $278 million in 2022 and 2021, respectively as compared to net income of $192 million and $35 million in 2022 and 2021, 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 Specifically, the $455 million in 2019 as comparedfavorable cash flow impact related to net income of $209 million. The difference primarily results from net changes in working capital balances for projects as discussed below:
The $16accounts receivable and the $376 million unfavorable cash flow impact related to accounts receivable waspayable were primarily related to increased billing volume due to the ramp up of recently awarded cost-reimbursable projectsdriven by collections and payments 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.
|
| |
• | 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.
|
Cash provided by operations totaled $165 million in 2018 as compared to net incomefirst quarter 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 million favorable cash flow impact related to accounts payable was primarily related to an increase in accounts payable2022 related to the consolidated Aspire Defence subcontracting entities subsequent tosignificant volume from the dateOAW program in the fourth quarter of 2021 that was substantially completed in the first quarter of 2022. Additionally, we obtained control and growthmade an advance payment in our business on various other U.S. government projects. This increase was partially offset by decreases in accounts payable relatedOctober 2022 to our ES and Technology business segments.U.K. pension plan for approximately £29 million of the £33 million required minimum annual contributions for the year ending December 31, 2023.
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.
| |
• | In addition, we received distributions of earnings from our unconsolidated affiliates of $75 million and contributed $41 million to our pension funds in 2018.
|
Investing activities. Cash used inprovided by investing activities totaled $158$37 million in 20192022 and was primarily due to a return of investment of approximately $190 million from JKC resulting from the receipt of the first payment from the Subcontractor Settlement Agreement, a return of investment from BRIS of $10 million as our cumulative distributions from inception of the joint venture exceeded our cumulative earnings and proceeds of $55 million from the sale of our investment interest in JKC.three U.K. Road Projects. See Note 810 "Equity Method Investments and Variable Interest Entities" for further details. This was partially offset by our first payment related to our consolidated financial statementsan additional investment of $61 million in Mura Technology, $71 million in
capital expenditures, $13 million net cash paid upon divestiture of a joint venture acquired as part of a historical GS acquisition and $73 million netcash used for discussionthe acquisition of the Ichthys Project and our investment contributions to JKC.VIMA. See Note 4 "Acquisitions" for further details.
Cash used in investing activities totaled $491$428 million in 2018 and was primarily due to2021, which included $406 million of net cash used for the acquisition of SGTFrazer-Nash and Harmonic and the acquisition of a technology license, $29 million of cash used primarily for funding our proportionate share of JKC's ongoing legal and commercial costs, $7 million for our initial investment in JKC,Mura Technology and $30 million used for capital expenditures, partially offset by the incremental cash resultingproceeds received of $44 million, which was primarily from the consolidationsale of our investment interest in the Aspire subcontracting entities.Middle East Petroleum Corporation (EBIC Ammonia project).
Financing activities. Cash used in financing activities totaled $133$399 million in 20192022 and was primarily due to $70$193 million of repurchases of common stock under our share repurchase program, $66 million of dividend payments to common shareholders, $116 million in net payments on borrowings underrelated to our Senior Credit Facility, and $46$11 million repayment on our finance lease obligations, $10 million for dividend paymentsthe repurchase of common stock under our "withheld to cover" program and dividends paid to NCI shareholders of $4 million. These decreases were partially offset by $5 million in net proceeds received from the issuance of common stock and $3 million in investments from NCI shareholders.
Cash provided by financing activities totaled $654$87 million in 20182021 and was primarily includes $1.1 billiondue to borrowings of $290 million on our Senior Credit Facility and $12 million in borrowings on Term Loans A and B, $350 millionnet proceeds received from the issuance of Convertible Notes, $250 million from borrowings from revolving credit agreement and $22 million from proceeds from sale of warrants. These sources of cash were partiallycommon stock, offset by $820$78 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 $62related to our Senior Credit Facility, $13 million in purchase of note hedges, $57 million in debt issuance costs, $56 million to acquire the noncontrolling interest in the Aspire Defence subcontracting entities and the remaining 25% noncontrolling interest in one ofrepayment on our other joint ventures and $44finance lease obligations, $4 million for dividend paymentsthe repurchase of common stock under our "withheld to cover" program, $4 million repayment on our non-recourse debt associated with our Fasttrax joint venture and dividends paid to NCI shareholders of our common stock.$23 million (of which $15 million was driven by the dividends paid to the minority interest of the sale of the EBIC Ammonia plant). 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 arbitration and court proceedings between the Parties. As part of the Settlement Agreement, KBR’s letters of credit were also reduced to $82 million from $164 million.
In April 2022, JKC entered into the Subcontractor Settlement Agreement to resolve outstanding claims and disputes between JKC and the consortium of subcontractors. As a result of the Subcontractor Settlement Agreement, JKC received the first payment of AUD 270 million in its project estimates-at-completion significant revenues associated with unapproved change ordersApril 2022. In May 2022, JKC distributed the payment to KBR at current exchange rates and net of legal expenses resulting in the receipt of approximately $190 million. The second payment of AUD 90 million is expected to be paid to JKC in March 2023. KBR recorded a non-cash charge to equity in earnings (losses) of unconsolidated affiliates in the amount of $137 million during the first quarter of 2022, which reflected KBR’s proportionate share of JKC's claims against the clientConsortium.
On May 17, 2022, we entered into Amendment No.6 under our existing Credit Agreement, dated as well as estimated recoveries of claims against suppliersApril 25, 2018, to (i) remove certain provisions requiring that the net cash proceeds received from the Subcontractor Settlement Agreement be applied to prepay principal amounts owed under Term Loan A and subcontractors. The client has reserved their contractual rights on(ii) amend a certain amounts previously fundedprovision to JKCpermit KBR instead to apply such net cash proceeds for working capital and may seek recoveries of those amounts.
JKC incurred substantial costs to completeother general corporate purposes. As such, the power plant under the fixed-price portionnet cash proceeds were used for repayment of the Ichthys LNG contract. JKC believes these costs are recoverable fromRevolver, funding of the Consortium who abandoned their contractual obligation to completefirst tranche of the power plant as the original subcontractor. We have initiated arbitrationsMura investment 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 theworking capital requirements to complete the power plant as these legal proceedings progress.requirements.
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 sheetsheets a funding deficitsurplus of $277$46 million (measured as the difference between the fair value of plan assets and the projected benefit obligation)obligation as of December 31, 2022) for our frozen U.K. defined benefit pension plans.plan. The total amountsamount of employer pension contributions paid for the year ended December 31, 2019 were $452022 is $73 million and primarily related tofor our defined benefit plan in the U.K. This amount includes an advance payment disbursed in October 2022 to our U.K. pension plan for approximately £29 million of the £33 million required minimum annual contributions for the year ending December 31, 2023. 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 trusteesTrustee of the U.K. pension plan that is negotiated on a triennial basis. The bindingIn June 2022, KBR and the Trustee executed an 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. The agreement calls forrequiring minimum annual contributions of approximately £33 million ($4339 million at current exchange rates) from 2019for the period through March 2028. This schedule of contributions will be reviewed by the next valuation.Trustee and KBR no later than 15 months after the effective date of each actuarial valuation, due every three years. 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.
CreditSales of Receivables. From time to time, we sell certain receivables to unrelated third-party financial institutions under various accounts receivable monetization programs. One such program is with MUFG Bank, Ltd. (“MUFG”) under a Master Accounts Receivable Purchase Agreement (the “RPA”), which provides the sale to MUFG of certain of our designated eligible receivables, with a significant portion of such receivables being owed by the U.S. government. We plan to continue to utilize these programs to ensure we have flexibility in regards to meeting our capital needs. Refer to Note 22 "Financial Instruments and Risk Management" to our consolidated financial statements for further discussion on our sales of receivables.
Mura Technology. In June 2022, we announced that we entered into an agreement to invest an additional £80 million in Mura Technology in which the funding is expected in two tranches. The first payment of £48 million was distributed during the quarter ended June 30, 2022 and the second payment of £32 million is expected to be paid in Q1 of 2023 with cash on hand.
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 Debt
Information
On November 15, 2018, we issued and sold $350 million of 2.50% Convertible Senior Notes due 2023 (the "Convertible Notes") pursuant to an indenture between us and Citibank, N.A., as trustee. The Convertible Notes mature on November 1, 2023 and, as such, are classified as current liabilities on our consolidated balance sheets as of December 31, 2022. The Convertible Notes are convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. It is our current intent to settle the principal balance of the Convertible Notes in cash. We may settle any excess value upon conversion in cash, shares of our common stock or a combination of both at our election.
Concurrent with the issuance of the Convertible Notes, we entered into privately negotiated convertible note hedge transactions (the "Note Hedge Transactions") and warrant transactions (the "Warrant Transactions") with the option counterparties. These transactions represent a call spread overlay, whereby the cost of the Note Hedge Transactions we purchased to cover the cash outlay upon conversion of the Convertible Notes was reduced by the sales price of the Warrant Transactions.
As of December 31, 2022, the if-converted value of the Convertible Notes based on the closing share price exceeded the $350 million principal amount by approximately $381 million. The incremental value over the principal amount would be fully offset by the shares we are allowed to purchase under the Note Hedge Transaction. However, the counterparties holding the warrants would have the right to purchase the same number of shares we would receive at a strike price of $39.63 resulting in value of $182 million that would have been delivered to the counterparties as of December 31, 2022.
For more information relating to our nonrecourse project debt is described inConvertible Notes, Note 14Hedge Transactions and Warrant Transactions, refer to 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, 2019,2022, we had no material guarantees of the work or obligations of third parties recorded.
We have both
As of December 31, 2022, we had $1 billion in a committed line of credit under the Senior Credit Facility and $449 million of uncommitted lines of credit available to be usedsupport the issuance of letters of credit. As of December 31, 2022, with respect to our Senior Credit Facility, we had $260 million of outstanding borrowings previously issued to fund the acquisition of Centauri and $47 million of outstanding letters of credit. With respect to our $449 million of uncommitted lines of credit, we had utilized $248 million for letters of credit. Ourcredit as of December 31, 2022. 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.$894 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, 20192022 are as follows:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
| Debt obligations (a) | $ | 365 | | | $ | 26 | | | $ | 26 | | | $ | 353 | | | $ | 485 | | | $ | 250 | | | $ | 1,505 | |
| Interest (b) | 90 | | | 77 | | | 68 | | | 62 | | | 16 | | | 11 | | | 324 | |
| Operating leases | 44 | | | 51 | | | 43 | | | 32 | | | 29 | | | 102 | | | 301 | |
| Finance leases | 9 | | | 8 | | | 3 | | | — | | | — | | | — | | | 20 | |
| Pension funding obligation (c) | 8 | | | 39 | | | 39 | | | 39 | | | 39 | | | 13 | | | 177 | |
| Purchase obligations (d) | 38 | | | 11 | | | 3 | | | 1 | | | — | | | — | | | 53 | |
| Mura Investment (e) | 39 | | | — | | | — | | | — | | | — | | | — | | | 39 | |
| Total (f) | $ | 593 | | | $ | 212 | | | $ | 182 | | | $ | 487 | | | $ | 569 | | | $ | 376 | | | $ | 2,419 | |
| |
(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)On November 1, 2023, the Convertible Notes will mature. It is our current intent to settle the principal balance of $350 million in cash and any excess value upon conversion in cash, shares of our common stock or a combination of both at our election. (b)Determined based on long-term debt borrowings outstanding at the end of 2022 using the interest rates in effect for the individual borrowings as of December 31, 2022, 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.
(c)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 ($39 million at current exchange rates) from 2023 through the next valuation. On October 17, 2022, we made an advance payment to our U.K. pension plan for approximately £29 million of the £33 million required minimum annual contributions for the year ending December 31, 2023.
(d)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.
(e)In June 2022, we announced that we entered into an agreement to invest an additional £80 million in Mura Technology in which the funding is expected in two tranches. The first payment of £48 million was distributed during the quarter ended June 30, 2022 and the second payment of £32 million is expected to be paid in Q1 of 2023 with cash on hand.
(f)We have excluded uncertain tax positions totaling $92 million as of December 31, 2022. 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 profitrevenue over time on our services provided to joint ventures that we consolidate and our services provided to 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 and Contract Estimates. 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, 2019.2022 and is also applied to the revenues of our equity method investments included in equity in earnings of unconsolidated affiliates. 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. Variable consideration may be tied to our performance, cost targets, or achievement of milestones. 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, 2019 and 2018, we had recorded $978 million and $973 million, respectively, of claim revenue and subcontractor recoveries for
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. The FAR provides guidance on types of costs that are allowable in establishing prices for goods and services provided to datethe U.S. government and its agencies.Pricing, including the types of costs that are allowable, for non-U.S. government agencies and commercial customers is based on specific negotiations with each customer. We recognize revenue on cost-reimbursable contracts to the extent it is not probable a significant reversal will occur.
Our estimates of variable consideration and determination of whether to include such costs are includedamounts in the our estimates at completion. See Note 8 to our consolidated financial statements for our discussion on unapproved change orders and claims.
Purchase Price Allocation. We allocate the purchasetransaction 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 largely on the assumptions management believes a market participant would use in pricing the assetour assessment of legal enforceability, anticipated performance 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 allany other information (historical, current or forecasted) that is reasonably 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.us.
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 testhave 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 goodwill impairment ateach 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 level as of October 1 of each fiscal year using a two-step process that involves comparing theexceeds its estimated fair value, a quantitative test is required.
While we have the option to proceed directly to the quantitative test, for 2022, management performed a qualitative impairment assessment of eachour reporting unit to its carryingunits, of which there were no indications that it was more likely than not that the fair value including goodwill. The fair values 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 2022.
In 2020, for reporting units in our STS business segment, fair value was determined using a combination of two methods, oneblended approach 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).
value. For the 2019 annual goodwill impairment test underall 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 ranging from 8.03 to 15.51 times earnings and 0.56 to 2.22 times revenue. Undera reporting unit’s operating performance for the trailing twelve-month period. The income approach we estimatedestimates fair value by discounting each reporting unit’s estimated future cash flows using a weighted-average cost of capital reflectingthat 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, tax rates andestimates of future expected
changes in operating margins, tax rates 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 2019 ranged from 10.1% to 11.6%. 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.expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements. TheUnder the quantitative impairment test, the estimated 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 addition to the earnings and revenue multiples and the discount rates disclosed above, certain other judgments and estimates are used in our goodwill impairment test. If market conditions changeeach reporting unit is compared to those used in our market approach, or if actual future results of operations fall below the projections used in the income approach, our goodwill could become impaired in the future.
The fair value for a reporting unit in our ES business segment with goodwill of $94 million, exceeded its carrying value, by 266% based on projected growth rates and other market inputs including goodwill. If the timingcarrying value of significant, long-term project awards bythe reporting unit including goodwill exceeds its customers. The fair value, of this reporting unit and the related underlying assumptions are sensitivean impairment charge equal to the risk of future variances dueexcess would be recognized, up 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 estimating the fair value of this reporting unit could change, resulting in possible impairmenta maximum amount of goodwill allocated to that reporting unit. We can resume the qualitative assessment in the future. We determined that the fair value of our remainingany subsequent period for any reporting units substantially exceeded their respective carrying values.unit.
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.
Our ability to utilize the unreserved foreign tax credit carryforwards is based on our ability to generate income from foreign sources of approximately $824$557 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$676 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 disclosuredisclose matters when there is a reasonable possibility that the ultimate loss will exceed our recorded liability bywe believe a material amountloss is at least reasonably possible but not probable or if the loss is not reasonably estimable but probable and 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%4.91% at December 31, 20192022 from 3.98%2.45% at December 31, 2018.2021. The discount rate utilized to determine the projected benefit obligation at the measurement date for our U.K. pension plan, which constitutes 96%98% of all international plans, decreasedincreased to 2.05%5.00% at December 31, 20192022 from 2.90%1.80% at December 31, 2018.2021. Our expected long-term rates of return on plan assets utilized at the measurement date increased to 6.09%6.63% from 6.01%5.19% for our U.S. pension plans and decreasedincreased to 5.09%6.00% from 5.20%4.67% for our U.K. pension plans, for the years ended December 31, 20192022 and 2018,2021, 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 2023 | | Pension Benefit Obligation at December 31, 2022 |
| Dollars in millions | U.S. | | U.K. | | U.S. | | U.K. |
| 25-basis-point decrease in discount rate | $ | — | | | $ | (1) | | | $ | 1 | | | $ | 37 | |
| 25-basis-point increase in discount rate | $ | — | | | $ | 1 | | | $ | (1) | | | $ | (35) | |
| 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 |
|
| | | | | | | | | | | | | | | |
| | 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, 20192022 was $878 million, of which $25 million is expected to be recognized as a component of our expected 2020 pension expense compared to $18 million in 2019.$771 million.
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 cash 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 cash 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 cash 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 use derivative instruments, such as foreign exchange forward contracts, to hedge foreign currency risk related to non-functional currency assets and liabilities on our consolidated balance sheets. We do not enter into derivative financial instruments for trading purposes or make speculative investments in foreign currencies. We recorded 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, 2019, 2018 and 2017, respectively.
We also use derivative instruments to hedge foreign currency risk related to monetary 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. We recorded a net gain of $4 million for the years ended December 31, 2022 and December 31, 2020 and a net loss of $8 million for the year ended December 31, 2021 in other non-operating income (expense) on our consolidated statements of operations. 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$260 million of borrowings outstanding under the revolving credit facilityRevolver to partially fund the acquisition of Centauri and $932$904 million outstanding under the term loan portions of ourthe Senior Credit Facility as of December 31, 2019.2022. 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 ofwith a notional value of our outstanding term loans. Under these swap agreements,$500 million, where we receive one monthreceived one-month LIBOR rate and pay an averagepaid a monthly fixed rate of 3.055% for the term of the swaps which expireexpired in September 2022. In March 2020, we entered into additional swap agreements with a notional value of $400 million, which were effective beginning October 2022.2022 and mature in January 2027. Under the March 2020 swap agreements, we receive one-month LIBOR and pay a monthly fixed rate of 0.965% for the term of the swaps. In late September 2022 and early October 2022, we entered into additional interest rate swap agreements with an initial notional value of $250 million from the effective date of October 2022 to October 2023. Effective November 2023, the notional value will increase to $350 million through maturity in January 2027. We will receive one-month LIBOR and pay a monthly fixed rate of 3.507% for the term of the swaps. 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 liabilitynet asset of approximately $21$48 million as of December 31, 2019.2022, of which $19 million is included in other current assets and $29 million is included in other assets.
At December 31, 2019,2022, we had fixed rate debt aggregating $850 million$1.3 billion and variable rate debt aggregating $432$514 million, after taking into account the effects of the interest rate swaps.swaps that were effective at December 31, 2022. Our weighted average interest rate for the year ended December 31, 20192022 was 5.29%4.05%. If interest rates were to increase by 50 basis points, pre-tax interest expense would increase by approximately $2$3 million in the next twelve months net of the impact from our swap agreements, based on outstanding borrowings as of December 31, 2019.2022.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
KBR, Inc.:Inc:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of KBR, Inc.Inc and subsidiaries (the Company) as of December 31, 20192022 and 2018,December 31, 2021, the related consolidated statements of operations, and comprehensive income shareholders’(loss), stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2019,2022, 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, 20192022 and 2018,December 31, 2021, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2019,2022, 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, 2019,2022, 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, 202017, 2023 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 MattersMatter
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that: (1) relaterelates 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 a critical audit mattersmatter 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 mattersmatter below, providing a separate opinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
Evaluation of variable consideration
Contract revenue and estimated costs at completion for long-term, fixed-price construction contractscontract cost estimates
As discusseddescribed in NotesNote 1 and 8 to the consolidated financial statements, a portion of the Company recognizesCompany's revenue and equity in earnings of 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 that a significant reversal of cumulative revenue recognized will not occur. The Company measures progress toward completion using the cost-to-cost method which measures progress as the ratioto measure progress. Revenue recognition under this method requires judgments to prepare estimates of (1) actualtotal contract costs, incurredspecifically assumptions related to dateestimated labor costs, and total contract revenue, including amounts related to (2) the Company’s estimated costs at completion (EAC). In estimating the transaction price, judgments are required to determine the amountachievement of consideration for index-based price adjustmentsmilestones and claims against customers. In estimating the measure of progress, judgments are required to determine the estimatedcontractually allowable costs.
amount of costs to complete contracts in progress, including costs for subcontractor commitments and contingencies, as well as probable recoveries from claims against suppliers and subcontractors.
We identified the evaluation of variable considerationtotal contract costs and EACstotal contract revenues for long-term, fixed-price constructioncertain contracts 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 resolutionCompany's estimates of claims is uncertain. Evaluating the amount of considerationtotal contract costs for index-based price adjustments involves auditor judgment given the variability and uncertainty associated with changes in the index. Evaluating the EAC forcertain contracts in progress involves auditor judgment given the variability and uncertainty associated with estimating costs, including subcontractor commitments and contingencies,estimated labor costs, to be incurred over a long-term contract period. Evaluating the Company's estimates of total contract revenue for certain contracts requires an evaluation of subjective assumptions, including projected achievement of milestones and contractually allowable costs.
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)total contract costs, specifically assumptions related to complete long-term, fixed-price contracts in progress,estimated labor costs, and total contract revenue, including costs for subcontractor commitmentsamounts related to achievement of milestones and contingencies, as well as probable recoveries from claims against suppliers and subcontractors, (2) amounts expected to be recovered from claims against customers, and (3) index-based price adjustments.contractually allowable costs. We evaluated the Company’s ability to estimate these amounts by comparing the Company’s previous estimatesestimated project margins to actual results. We assessedTo assess 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 recovery for certain claims against customers, suppliers, and subcontractors by comparing the Company’s estimate against our independently developed rangereasonableness 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 EAC by (1) these estimates, we performed audit procedures including:
•obtaining and inspectingreading contractual documents with customerscustomers;
•inquiring of financial and subcontractors, (2) interviewing projectoperational personnel to gain an understanding of the statusCompany to identify factors that should be considered within the estimated costs at completion or indications of project activities, and (3) obtaining and potential management bias;
•analyzing underlying documentation for a selection of costs in the EAC, including subcontractor commitments and contingencies.labor costs;
Evaluation of the realizability of foreign tax credit carryforwards
As discussed in Notes 1 and 15 to the consolidated financial statements, the Company had $255 million 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 has determined there is 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.
We identified the evaluation of the realizability of foreign tax credit carryforwards as a critical audit matter. Applying and evaluating the results of our procedures required a high degree of auditor judgment related to forecasted amounts and timing of foreign sourced income as the valuation allowance is sensitive to changes in these assumptions. Additionally, specialized skills are necessary to evaluate tax elections.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process for evaluating the realizability of foreign tax credit carryforwards, including controls related to (1) the development of the forecasted taxable foreign sourced income, and (2) tax elections. To assess the Company’s ability to estimate taxable foreign sourced income, we compared the Company’s previous forecasts to actual results. We performed•performing sensitivity analyses overon labor rates;
•comparing allowable cost assumptions to contract terms and considering historical results and trends; and
•comparing estimates underlying milestones to supporting schedules and considering publicly available information and correspondence with the amount and timing of forecasted taxable foreign sourced income 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.customer.
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 their impact on the Company’s determination of the fair value of the reporting units. To assess the Company’s ability to estimate reporting unit revenues and margins, we compared the Company’s historical cash flow forecasts to actual results. We tested the reconciliation of the fair value of the Company’s reporting units to the market capitalization of the Company.
/s/ KPMG LLP
We have served as the Company’s auditor since 2005.
Houston, Texas
February 24, 202017, 2023
KBR, Inc.
Consolidated Statements of Operations and Comprehensive Income
(In millions, except for per share data)
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2022 | | 2021 (1) | | 2020 (1) |
| | | | | |
| Revenues | $ | 6,564 | | | $ | 7,339 | | | $ | 5,767 | |
| Cost of revenues | (5,736) | | | (6,533) | | | (5,101) | |
| Gross profit | 828 | | | 806 | | | 666 | |
| Equity in earnings (losses) of unconsolidated affiliates | (80) | | | (170) | | | 30 | |
| Selling, general and administrative expenses | (420) | | | (393) | | | (335) | |
| Acquisition and integration related costs | (2) | | | (12) | | | (9) | |
| Gain on disposition of assets and investments | 19 | | | 2 | | | 18 | |
| Goodwill impairment | — | | | — | | | (99) | |
| Restructuring charges, asset impairments and other | (2) | | | (2) | | | (214) | |
| | | | | |
| Operating income | 343 | | | 231 | | | 57 | |
| Interest expense | (87) | | | (80) | | | (72) | |
| Unrealized gain on other investment | 16 | | | 4 | | | — | |
| Other non-operating income (expense) | 12 | | | (9) | | | 1 | |
| Income before income taxes | 284 | | | 146 | | | (14) | |
| Provision for income taxes | (92) | | | (111) | | | (28) | |
| Net income (loss) | 192 | | | 35 | | | (42) | |
| Less: Net income attributable to noncontrolling interests | 2 | | | 8 | | | 21 | |
| Net income (loss) attributable to KBR | $ | 190 | | | $ | 27 | | | $ | (63) | |
| Net income (loss) attributable to KBR per share | | | | | |
| Basic | $ | 1.36 | | | $ | 0.19 | | | $ | (0.44) | |
| Diluted | $ | 1.26 | | | $ | 0.19 | | | $ | (0.44) | |
| Basic weighted average common shares outstanding | 139 | | | 140 | | | 142 | |
| Diluted weighted average common shares outstanding | 156 | | | 141 | | | 142 | |
| Cash dividends declared per share | $ | 0.48 | | | $ | 0.44 | | | $ | 0.40 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| | 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 |
|
See accompanying notes to consolidated financial statements.
KBR, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| 2022 | | 2021 (1) | | 2020 (1) |
| | | | | |
| Net income (loss) | $ | 192 | | | $ | 35 | | | $ | (42) | |
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation adjustments | (56) | | | (4) | | | 23 | |
| Pension and post-retirement benefits | 17 | | | 227 | | | (136) | |
| Changes in fair value of derivatives | 53 | | | 31 | | | (13) | |
| Other comprehensive income (loss) | 14 | | | 254 | | | (126) | |
| Income tax (expense) benefit: | | | | | |
| Foreign currency translation adjustments | — | | | (1) | | | 1 | |
| Pension and post-retirement benefits | (4) | | | (44) | | | 26 | |
| Changes in fair value of derivatives | (11) | | | (7) | | | 3 | |
| Income tax (expense) benefit | (15) | | | (52) | | | 30 | |
| Other comprehensive (loss) income, net of tax | (1) | | | 202 | | | (96) | |
| Comprehensive income (loss) | 191 | | | 237 | | | (138) | |
| Less: Comprehensive income attributable to noncontrolling interests | 2 | | | 8 | | | 21 | |
| Comprehensive income (loss) attributable to KBR | $ | 189 | | | $ | 229 | | | $ | (159) | |
(1) As adjusted for the adoption of ASU 2020-06 using the full retrospective method.
See accompanying notes to consolidated financial statements.
KBR, Inc.
Consolidated Balance Sheets
(In millions, except share data)
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 (1) |
| | | |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 389 | | | $ | 370 | |
| Accounts receivable, net of allowance for credit losses of $9 and $13 | 942 | | | 1,411 | |
| Contract assets | 252 | | | 224 | |
| | | |
| Other current assets | 164 | | | 147 | |
| Total current assets | 1,747 | | | 2,152 | |
| Claims and accounts receivable | 29 | | | 30 | |
| Pension assets | 46 | | | 1 | |
| Property, plant, and equipment, net of accumulated depreciation of $417 and $431 (including net PPE of $22 and $19 owned by a variable interest entity) | 182 | | | 136 | |
| Operating lease right-of-use assets | 164 | | | 158 | |
| Goodwill | 2,087 | | | 2,060 | |
| Intangible assets, net of accumulated amortization of $332 and $291 | 645 | | | 708 | |
| Equity in and advances to unconsolidated affiliates | 188 | | | 576 | |
| Deferred income taxes | 213 | | | 231 | |
| Other assets | 265 | | | 152 | |
| Total assets | $ | 5,566 | | | $ | 6,204 | |
| Liabilities and Shareholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 637 | | | $ | 1,026 | |
| Contract liabilities | 275 | | | 313 | |
| Accrued salaries, wages and benefits | 325 | | | 317 | |
| Current maturities of long-term debt | 364 | | | 16 | |
| Operating lease liabilities | 48 | | | 41 | |
| Other current liabilities | 172 | | | 162 | |
| Total current liabilities | 1,821 | | | 1,875 | |
| Pension obligations | 11 | | | 88 | |
| Employee compensation and benefits | 105 | | | 111 | |
| Income tax payable | 117 | | | 95 | |
| Deferred income taxes | 92 | | | 70 | |
| | | |
| | | |
| Long term debt | 1,376 | | | 1,875 | |
| Operating lease liabilities | 193 | | | 188 | |
| | | |
| Other liabilities | 219 | | | 219 | |
| Total liabilities | 3,934 | | | 4,521 | |
| Commitments and Contingencies (Notes 6, 14 and 15) | | | |
| 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, 180,807,960 and 179,983,586 shares issued, and 136,505,145 and 139,786,136 shares outstanding, respectively | — | | | — | |
| Paid-in capital in excess of par | 2,235 | | | 2,206 | |
| Retained earnings | 1,410 | | | 1,287 | |
| Treasury stock, 44,302,815 shares and 40,197,450 shares, at cost, respectively | (1,143) | | | (943) | |
| Accumulated other comprehensive loss | (882) | | | (881) | |
| Total KBR shareholders’ equity | 1,620 | | | 1,669 | |
| Noncontrolling interests | 12 | | | 14 | |
| Total shareholders’ equity | 1,632 | | | 1,683 | |
| Total liabilities and shareholders’ equity | $ | 5,566 | | | $ | 6,204 | |
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| | | | |
| Assets | | | |
| Current assets: | | | |
| Cash and equivalents | $ | 712 |
| | $ | 739 |
|
| Accounts receivable, net of allowance for doubtful accounts of $14 and $9 | 938 |
| | 927 |
|
| Contract assets | 215 |
| | 185 |
|
| Other current assets | 146 |
| | 108 |
|
| Total current assets | 2,011 |
| | 1,959 |
|
| 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 |
|
| Operating lease right-of-use assets | 175 |
| | — |
|
| Goodwill | 1,265 |
| | 1,265 |
|
| Intangible assets, net of accumulated amortization of $184 and $151 | 495 |
| | 516 |
|
| Equity in and advances to unconsolidated affiliates | 850 |
| | 724 |
|
| Deferred income taxes | 236 |
| | 222 |
|
| Other assets | 143 |
| | 147 |
|
| Total assets | $ | 5,364 |
| | $ | 5,052 |
|
| Liabilities and Shareholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 572 |
| | $ | 546 |
|
| Contract liabilities | 484 |
| | 463 |
|
| Accrued salaries, wages and benefits | 209 |
| | 221 |
|
| Nonrecourse project debt | 11 |
| | 10 |
|
| Operating lease liabilities | 39 |
| | — |
|
| Other current liabilities | 186 |
| | 179 |
|
| Total current liabilities | 1,501 |
| | 1,419 |
|
| Pension obligations | 277 |
| | 250 |
|
| Employee compensation and benefits | 115 |
| | 109 |
|
| Income tax payable | 92 |
| | 84 |
|
| Deferred income taxes | 16 |
| | 27 |
|
| Nonrecourse project debt | 7 |
| | 17 |
|
| Long term debt | 1,183 |
| | 1,226 |
|
| Operating lease liabilities | 192 |
| | — |
|
| Other liabilities | 124 |
| | 202 |
|
| Total liabilities | 3,507 |
| | 3,334 |
|
| 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 | — |
| | — |
|
| PIC | 2,206 |
| | 2,190 |
|
| Retained earnings | 1,441 |
| | 1,235 |
|
| Treasury stock, 36,511,053 shares and 36,483,270 shares, at cost, respectively | (817 | ) | | (817 | ) |
| AOCL | (987 | ) | | (910 | ) |
| Total KBR shareholders’ equity | 1,843 |
| | 1,698 |
|
| Noncontrolling interests | 14 |
| | 20 |
|
| Total shareholders’ equity | 1,857 |
| | 1,718 |
|
| Total liabilities and shareholders’ equity | $ | 5,364 |
| | $ | 5,052 |
|
See accompanying notes to consolidated financial statements.
KBR, Inc.
Consolidated Statements of Shareholders’ Equity
(In millions)
|
| | | | | | | | | | | |
| | 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dollars in millions | Total | | PIC | | Retained
Earnings | | Treasury
Stock | | AOCL | | NCI |
| Balance at December 31, 2019 | $ | 1,853 | | | $ | 2,206 | | | $ | 1,437 | | | $ | (817) | | | $ | (987) | | | $ | 14 | |
| Cumulative adjustment for the adoption of ASC 326, net of tax | (3) | | | — | | | (3) | | | — | | | — | | | — | |
| Cumulative adjustment for the adoption of ASU 2020-06 | (36) | | | (45) | | | 9 | | | — | | | — | | | — | |
| Adjusted balance at January 1, 2020 | 1,814 | | | 2,161 | | | 1,443 | | | (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 (loss) | (42) | | | — | | | (63) | | | — | | | — | | | 21 | |
| Other comprehensive loss, net of tax | (96) | | | — | | | — | | | — | | | (96) | | | — | |
| Balance at December 31, 2020 | $ | 1,582 | | | $ | 2,177 | | | $ | 1,323 | | | $ | (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 | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Distributions to noncontrolling interests | (23) | | | — | | | — | | | — | | | — | | | (23) | |
| Other | 4 | | | 4 | | | — | | | — | | | — | | | — | |
| Net income | 35 | | | — | | | 27 | | | — | | | — | | | 8 | |
| Other comprehensive income, net of tax | 202 | | | — | | | — | | | — | | | 202 | | | — | |
| Balance at December 31, 2021 | $ | 1,683 | | | $ | 2,206 | | | $ | 1,287 | | | $ | (943) | | | $ | (881) | | | $ | 14 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Share-based compensation | 21 | | | 21 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Common stock issued upon exercise of stock options | 5 | | | 5 | | | — | | | — | | | — | | | — | |
| Dividends declared to shareholders ($0.48/share) | (67) | | | — | | | (67) | | | — | | | — | | | — | |
| Repurchases of common stock | (203) | | | — | | | — | | | (203) | | | — | | | — | |
| Issuance of ESPP shares | 6 | | | 3 | | | — | | | 3 | | | — | | | — | |
| | | | | | | | | | | |
| Investments by noncontrolling interests | 3 | | | — | | | — | | | — | | | — | | | 3 | |
| Distributions to noncontrolling interests | (4) | | | — | | | — | | | — | | | — | | | (4) | |
| Other noncontrolling interests activity | (3) | | | | | — | | | | | — | | | (3) | |
| Net income | 192 | | | — | | | 190 | | | — | | | — | | | 2 | |
| Other comprehensive income (loss), net of tax | (1) | | | — | | | — | | | — | | | (1) | | | — | |
| Balance at December 31, 2022 | $ | 1,632 | | | $ | 2,235 | | | $ | 1,410 | | | $ | (1,143) | | | $ | (882) | | | $ | 12 | |
| | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
KBR, Inc.
Consolidated Statements of Cash Flows
(In millions)
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| | 2022 | | 2021 (1) | | 2020(1) |
| | | | | |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | 192 | | | $ | 35 | | | $ | (42) | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 137 | | | 146 | | | 115 | |
| Equity in (earnings) losses of unconsolidated affiliates | 80 | | | 170 | | | (30) | |
| Deferred income tax (benefit) expense | 37 | | | 47 | | | (38) | |
| Gain on disposition of assets | (19) | | | (2) | | | (18) | |
| | | | | |
| Goodwill impairment | — | | | — | | | 99 | |
| Asset impairments | — | | | 2 | | | 98 | |
| Unrealized gain on other investment | (16) | | | (4) | | | — | |
| Other | 33 | | | 48 | | | 32 | |
| Changes in operating assets and liabilities, net of acquired businesses: | | | | | |
| Accounts receivable, net of allowance for credit losses | 455 | | | (476) | | | 127 | |
| Contract assets | (30) | | | (48) | | | 39 | |
| Claims receivable | 1 | | | — | | | 29 | |
| Accounts payable | (376) | | | 447 | | | (40) | |
| Contract liabilities | (25) | | | (17) | | | (134) | |
| Accrued salaries, wages and benefits | 16 | | | 38 | | | 38 | |
| Payments on operating lease liabilities | (63) | | | (59) | | | (61) | |
| | | | | |
| Payments from unconsolidated affiliates, net | 14 | | | 17 | | | 15 | |
| Distributions of earnings from unconsolidated affiliates | 66 | | | 47 | | | 38 | |
| | | | | |
| Pension funding | (74) | | | (46) | | | (46) | |
| | | | | |
| | | | | |
| | | | | |
| Restructuring reserve | (13) | | | (26) | | | 89 | |
| Other assets and liabilities | (19) | | | (41) | | | 57 | |
| Total cash flows provided by operating activities | 396 | | | 278 | | | 367 | |
| Cash flows from investing activities: | | | | | |
| Purchases of property, plant and equipment | (71) | | | (30) | | | (20) | |
| Net proceeds from sale of assets or investments | 47 | | | 44 | | | 1 | |
| Return of (investments in) equity method joint ventures, net | 198 | | | (29) | | | (26) | |
| Acquisitions of businesses, net of cash acquired | (73) | | | (399) | | | (832) | |
| Investment in other investment | (61) | | | (7) | | | — | |
| Acquisition of technology license | — | | | (7) | | | — | |
| Other | (3) | | | — | | | — | |
| Total cash flows provided by (used in) investing activities | $ | 37 | | | $ | (428) | | | $ | (877) | |
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| | 2022 | | 2021 (1) | | 2020(1) |
| Cash flows from financing activities: | | | | | |
| Borrowings on short-term and long term debt | — | | | 164 | | | 359 | |
| Borrowings on revolving credit facility | 58 | | | 126 | | | 260 | |
| Payments on short-term and long-term debt | (16) | | | (15) | | | (270) | |
| Payments on revolving credit facility | (158) | | | (16) | | | — | |
| Debt issuance costs | (6) | | | (3) | | | (5) | |
| | | | | |
| | | | | |
| | | | | |
| Payments of dividends to shareholders | (66) | | | (61) | | | (54) | |
| Net proceeds from issuance of common stock | 5 | | | 12 | | | 4 | |
| Payments to reacquire common stock | (203) | | | (82) | | | (51) | |
| | | | | |
| | | | | |
| Investments from noncontrolling interests | 3 | | | — | | | — | |
| Distributions to noncontrolling interests | (4) | | | (23) | | | (4) | |
| Other | (12) | | | (15) | | | (14) | |
| Total cash flows (used in) provided by financing activities | (399) | | | 87 | | | 225 | |
| Effect of exchange rate changes on cash | (15) | | | (3) | | | 9 | |
| Increase (decrease) in cash and cash equivalents | 19 | | | (66) | | | (276) | |
| Cash and equivalents at beginning of period | 370 | | | 436 | | | 712 | |
| Cash and equivalents at end of period | $ | 389 | | | $ | 370 | | | $ | 436 | |
| Supplemental disclosure of cash flows information: | | | | | |
| Cash paid for interest | $ | 66 | | | $ | 63 | | | $ | 53 | |
| Cash paid for income taxes (net of refunds) | $ | 47 | | | $ | 49 | | | $ | 49 | |
| Noncash investing activities | | | | | |
| Leasehold improvements paid by landlord | $ | 6 | | | $ | — | | | $ | — | |
| Accrued but unpaid purchases of property, plant and equipment | $ | 5 | | | $ | — | | | $ | — | |
| Noncash financing activities | | | | | |
| Dividends declared | $ | 16 | | | $ | 15 | | | $ | 14 | |
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 |
| | | | | | |
| Cash flows from financing activities: | | | | | |
| Payments to reacquire common stock | (4 | ) | | (3 | ) | | (53 | ) |
| Acquisition of remaining ownership interest in joint ventures | — |
| | (56 | ) | | — |
|
| Investments from noncontrolling interests | 1 |
| | — |
| | 1 |
|
| Distributions to noncontrolling interests | (14 | ) | | (3 | ) | | (4 | ) |
| 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 | ) | | — |
|
| Total cash flows provided (used) 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 | ) |
| Cash and equivalents at beginning of period | 739 |
| | 439 |
| | 536 |
|
| Cash and equivalents at end of period | $ | 712 |
| | $ | 739 |
| | $ | 439 |
|
| Supplemental disclosure of cash flows information: | | | | | |
| Cash paid for interest | $ | 80 |
| | $ | 52 |
| | $ | 21 |
|
| Cash paid for income taxes (net of refunds) | $ | 54 |
| | $ | 21 |
| | $ | 144 |
|
| Noncash investing activities | | | | | |
| Acquisition of technology licensing rights | $ | — |
| | $ | 16 |
| | $ | — |
|
| Noncash financing activities | | | | | |
| Dividends declared | $ | 11 |
| | $ | 11 |
| | $ | 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 with current period presentation.
Basis of Presentation
The Company operates on a calendar year ending on December 31. Effective beginning with fiscal year 2023, the Company approved a change in the fiscal year end to a 52 – 53 week year ending on the Friday closest to December 31. In a 52 week fiscal year, each of the Company’s quarterly periods will comprise 13 weeks. The additional week in a 53 week fiscal year is added to the currentfourth quarter, making such quarter consist of 14 weeks. The Company’s first 53 week fiscal year presentationwill occur in fiscal year 2024. The Company is making the fiscal year change on a prospective basis and will not adjust operating results for prior periods. The change to 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.
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 infiscal year will not impact 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,results for the yearsyear ended December 31, 2018 and 2017, $128 million and $97 million, respectively, was reclassified from "Cost2022. While the change will impact the prior year comparability 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 | ) |
Business Reorganization
Effective January 1, 2019, we changed the name of our Government Services segment to "Government Solutions", our Technology segment to "Technology Solutions" and our Hydrocarbons Services segment to "Energy Solutions". The change did not have an impact on our reportable segments.
As of January 1, 2019, our segments consisteach of the following 5 reportable segments:fiscal quarters and the annual period in 2023, we do not expect the impact to be material.
Government Solutions
Technology Solutions
Energy Solutions
Non-strategic Business
Other
See Note 2 to our consolidated financial statements for further discussion on our segments. We have presented our segment results reflecting these changes for all periods presented. In conjunction with the change in segments, we evaluated goodwill associated with each of our reporting units using Level 3 fair value inputs, and no impairment indicators were identified.
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•evaluation of goodwill for impairment
recoverability•evaluation of other intangibles and long-lived assets and related estimated livesfor impairment
recoverability•evaluation of equity method investments for impairment
•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 combinationscombinations; and
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, adoptedand our equity method investments, recognize 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 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, including the types of costs that are allowable, 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 incurred are generally charged tocapitalized as deferred assets and amortized on a straight-line basis over the project as incurred when they are an integrated partanticipated term of the contract or a specified period of performance consistent with the transfer of control of the performance obligation being transferred to the client. These costs incurred may be to transition the services, employees and equipment to or from the customer, a prior contract or prior contractor. 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.
Variable Consideration
ItIn addition to the variable contract price under cost-reimbursable contracts, 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.
In 2018,Additionally, 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 ininstitutions under various accounts receivable becausemonetization programs. The receivables sold under the agreements transfer effective control over and risk related to the receivable to the purchaser. Our factoring agreement doesdo not allow for recourse infor any credit risk related to our customers if such receivables are not collected by the event of uncollectibility,third-party financial institutions. The Company accounts for these receivable transfers as a sale under Transfers and Servicing (Topic 860) as the receivables have been legally isolated from the Company, the financial institution has the right to pledge or exchange the assets received and we do not retain any controlling interest inmaintain effective control over the underlyingtransferred accounts receivable. Our only continuing involvement with the transferred financial assets is as the collection and servicing agent. As a result, the accounts receivable once sold. We derecognized $14 millionbalance on the consolidated balance sheets is presented net of accounts receivable asthe transferred amount. See Note 22 to our consolidated financial statements for our further information on sales 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.
AcquisitionsBusiness Combinations
We account for business combinations using the acquisition method of accounting in accordance with ASC 805 - Business Combinations (Topic 805), 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 (Topic 350), 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 2022 and 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 annual2022 and 2021. 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$645 million and $516$708 million as of December 31, 20192022 and 2018,2021, 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, NaN2022 and 2021, 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.
Equity Method 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.measurement alternative. Under the cost method,measurement alternative, 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.
We evaluate distributions received from our equity method investments using the nature of distribution approach. Under this approach, we evaluate the nature of activities of the investee that generated the distribution. The distributions received are either classified as a return on investment, which is presented as a component of operating activities on our consolidated statements of cash flows, or as a return of investment, which is presented as a component of investing activities on our consolidated statements of cash flows. For BRIS only, we apply the cumulative earnings approach for the cash flow classification of distributions as information is not available to evaluate the nature of the activities of the joint venture.
Other Investments
Other investments are investments in equity securities of privately held companies without readily determinable fair values and are included in other assets on our consolidated balance sheets. These investments are accounted for under the measurement alternative, provided that KBR does not have the ability to exercise significant influence or control over the investees. We measure the investments at cost, less any impairment, and adjust the carrying value to fair value resulting from observable transactions for identical or similar investments of the same issuer. If it is determined that impairment indicators exist and the carrying value is less than the fair value, we adjust the carrying value of the investment to its fair value and record the related impairment. The gains and losses on the investments are recognized in unrealized gain (loss) on other investment on our consolidated statements of operations.
Joint Ventures and VIEs
The majority of our joint ventures are VIEs. We account for VIEs in accordance with ASC 810 - Consolidation (Topic 810), 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.Business Combinations (Topic 805).
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 (Topic 815), 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, all changes in the fair value of derivatives are recognized in other comprehensive income (loss) untiland are subsequently reclassified into earnings in the period in which the hedged item is recognized in earnings. The ineffective portion of a designated hedge's change in fair value is recognized inforecasted transaction affects 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 totable summarizes our transactionsrevenues and accounts receivable for contracts with U.S. and U.K governmental agencies.U.K. government agencies for which we are the prime contractor, as well as for contracts in which we are a subcontractor and the ultimate customer is a U.S. or U.K. government agency, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues and percentage of consolidated revenues from major customers: |
| | Years ended December 31, |
| Dollars in millions | 2022 | | 2021 | | 2020 |
| U.S. government | $ | 4,034 | | 61 | % | | $ | 5,122 | | 70 | % | | $ | 3,079 | | 53 | % |
| U.K. government | $ | 584 | | 9 | % | | $ | 508 | | 7 | % | | $ | 573 | | 10 | % |
|
| | | | | | | | | | | |
| 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 | 2022 | | 2021 | | |
| U.S. government | $ | 501 | | 53 | % | | $ | 1,062 | | 75 | % | | |
| U.K. government | $ | 58 | | 6 | % | | $ | 81 | | 6 | % | | |
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. If an award is modified after the grant date, incremental compensation cost is recognized immediately as of the modification. The benefits of tax deductions in excess of the compensation cost recognized for the options (excess tax benefits) are classified as additional paid-in-capital and cash retained as a result of these excess tax benefits is presented in the statements of cash flows as financing cash inflows. 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.
Adoption of ASU 2020-06
Effective January 1, 2022, we adopted ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity ("ASU 2020-06") using the full retrospective method. Accordingly, the consolidated financial statements for the years ended December 31, 2021 and 2020 are presented as if ASU 2020-06 had been effective for those periods. This guidance simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. As such, we no longer separate the Convertible Senior Notes into liability and equity components. The conversion option that was previously accounted for in equity under the cash conversion model was recombined into the Convertible Senior Notes outstanding, and as a result, PIC and the related unamortized debt discount on the Convertible Senior Notes were reduced. The removal of the remaining debt discount recorded for this previous separation has the effect of increasing our net debt balance and increasing the amount of related deferred income taxes. ASU 2020-06 also eliminates the treasury stock method to calculate diluted earnings per share for certain convertible instruments and requires the use of the if-converted method. As such, we are required to apply the if-converted method to our Convertible Senior Notes when calculating diluted income (loss) per share. Under the if-converted method, the principal amount and any conversion spread of the Convertible Senior Notes, to the extent dilutive, are assumed to be converted into common stock at the beginning of the period and net income (loss) attributable to KBR is adjusted to reverse the effect of any interest expense associated with the Convertible Senior Notes.
For the years ended December 31, 2022, 2021 and 2020, the adoption of this standard did not materially impact our financial performance, financial position or cash flow, but it did result in an increase in the number of diluted weighted average shares outstanding utilized in our diluted income (loss) per share calculation in periods of net income attributable to KBR.
Select consolidated balance sheet line items, which reflect the adoption of ASU 2020-06, are as follows:
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Dollars in millions | As Previously Reported | | Adjustments | | As Adjusted |
| Assets: | | | | | |
| Deferred income taxes | $ | 226 | | | $ | 5 | | | $ | 231 | |
| | | | | |
| Liabilities: | | | | | |
| Long-term debt | $ | 1,852 | | | $ | 23 | | | $ | 1,875 | |
| | | | | |
| KBR Shareholders' Equity: | | | | | |
| PIC | $ | 2,251 | | | $ | (45) | | | $ | 2,206 | |
| Retained earnings | 1,260 | | | 27 | | | 1,287 | |
Select consolidated statement of operations line items, which reflect the adoption of ASU 2020-06, are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Dollars in millions | As Previously Reported | | Adjustments | | As Adjusted |
| Interest Expense | $ | (92) | | | $ | 12 | | | $ | (80) | |
| Income before income taxes | $ | 134 | | | $ | 12 | | | $ | 146 | |
| Provision for income taxes | $ | (108) | | | $ | (3) | | | $ | (111) | |
| Net income | $ | 26 | | | $ | 9 | | | $ | 35 | |
| Net income attributable to KBR | $ | 18 | | | $ | 9 | | | $ | 27 | |
| Net income attributable to KBR per share: | | | | | |
| Basic | $ | 0.13 | | | $ | 0.06 | | | $ | 0.19 | |
| Diluted | $ | 0.12 | | | $ | 0.07 | | | $ | 0.19 | |
| Basic weighted average common shares outstanding | 140 | | — | | | 140 |
| Diluted weighted average common shares outstanding | 145 | | (4) | | 141 |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Dollars in millions | As Previously Reported | | Adjustments | | As Adjusted |
| Interest Expense | $ | (83) | | | $ | 11 | | | $ | (72) | |
| Loss before income taxes | $ | (25) | | | $ | 11 | | | $ | (14) | |
| Provision for income taxes | $ | (26) | | | $ | (2) | | | $ | (28) | |
| Net loss | $ | (51) | | | $ | 9 | | | $ | (42) | |
| Net loss attributable to KBR | $ | (72) | | | $ | 9 | | | $ | (63) | |
| Net loss attributable to KBR per share: | | | | | |
| Basic | $ | (0.51) | | | $ | 0.07 | | | $ | (0.44) | |
| Diluted | $ | (0.51) | | | $ | 0.07 | | | $ | (0.44) | |
| Basic weighted average common shares outstanding | 142 | | — | | | 142 |
| Diluted weighted average common shares outstanding | 142 | | — | | | 142 |
Select consolidated statement of cash flows line items, which reflect the adoption of ASU 2020-06, are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Dollars in millions | As Previously Reported | | Adjustments | | As Adjusted |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 26 | | | $ | 9 | | | $ | 35 | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
| Deferred income tax expense | 44 | | | 3 | | | 47 | |
| Other | 60 | | | (12) | | | 48 | |
| Total cash flows provided by operating activities | $ | 278 | | | $ | — | | | $ | 278 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Dollars in millions | As Previously Reported | | Adjustments | | As Adjusted |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (51) | | | $ | 9 | | | $ | (42) | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
| Deferred income tax benefit | (40) | | | 2 | | | (38) | |
| Other | 43 | | | (11) | | | 32 | |
| Total cash flows provided by operating activities | $ | 367 | | | $ | — | | | $ | 367 | |
Impact of Adoption of New Accounting Standards
Effective January 1, 2022, we adopted ASU No. 2021-04, Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses measurement, treatment and recognition of a freestanding equity-classified written call option modification or exchange. The adoption of this standard did not have an impact on our consolidated financial statements.
Effective January 1, 2022, we adopted ASU 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities About Government Assistance, which requires entities to provide disclosures on material government assistance transactions for annual reporting periods. The disclosures include information around the nature of the assistance, the related accounting policies used to account for government assistance, the effect of government assistance on the entity’s financial statements and any significant terms and conditions of the agreements, including commitments and contingencies. The adoption of this standard did not have an impact on our consolidated financial statements.
Additional Balance Sheet Information
Other Current Assets. The components of "Otherother current assets"assets on our consolidated balance sheets as of December 31, 20192022 and 20182021 are presented below:
| | | | | | | | | | | |
| | December 31, |
| Dollars in millions | 2022 | | 2021 |
| | | |
| | | |
| Prepaid expenses | $ | 67 | | | $ | 75 | |
| Value-added tax receivable | 24 | | | 21 | |
| Advances to subcontractors | 18 | | | 15 | |
| Other miscellaneous assets | 55 | | | 36 | |
| Total other current assets | $ | 164 | | | $ | 147 | |
|
| | | | | | | |
| | 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, 20192022 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 20182021 are presented below:
| | | | | | | | | | | |
| | December 31, |
| Dollars in millions | 2022 | | 2021 |
| Value-added tax payable | $ | 32 | | | $ | 34 | |
| Dividend payable | $ | 17 | | | $ | 16 | |
| Reserve for estimated losses on uncompleted contracts | 17 | | | 17 | |
| Restructuring reserve | 13 | | | 17 | |
| Retainage payable | 11 | | | 13 | |
| | | |
| | | |
| | | |
| Other miscellaneous liabilities | 82 | | | 65 | |
| Total other current liabilities | $ | 172 | | | $ | 162 | |
|
| | | | | | | |
| | 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, we adopted ASU No. 2016-02, Leases (Topic 842) and related ASUs using the modified retrospective transition approach. 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 package of practical expedients which allowed us to 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 reclassified current and noncurrent deferred rent of $68 million associated with straight-line accounting 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.
As a result of the adoption, we recorded a cumulative-effect adjustment to retained earnings of $21 million, net of deferred taxes of $7 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 where 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 our consolidated balance sheet as of January 1, 2019, as follows:
|
| | | | | | | | | | | |
| | 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 of January 1, 2018.
In cases where we have an unconditional right to consideration from a customer in an amount that corresponds directly with the value of our performance completed to date, we recognize revenue in the amount to which we have a right to invoice for services performed.
We do not adjust the contract price for the effects of a significant financing component 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. As a result of the adoption by the Aspire Defence contracting entities, we identified multiple performance obligations associated with the project deliverables that were previously accounted for as a single deliverable under its contract with the MoD. In addition to the above impacts of adoption on revenue and gross margin, the cumulative effect of the adoption by Aspire Defence contracting entities resulted in sufficient additional income that had been previously recorded as "Deferred income from unconsolidated affiliates" on our consolidated balance sheets in the amount of $101 million, which was reversed and included in the cumulative effect adjustment. Also, deferred construction income in the amount of $87 million previously recorded in "Equity in and advance to unconsolidated affiliates" was reversed and included in the cumulative effect adjustment as a result of the early adoption of ASC 606 by the Aspire Defence contracting entities. We deferred the application of ASC 606 to our remaining unconsolidated joint ventures until January 1, 2019.
Effective January 1, 2019, we adopted ASU No. 2017-13, Revenue from Contracts with Customers (Topic 606)for our remaining unconsolidated affiliates, using the modified retrospective approach, except for unconsolidated VIEs associated with the Aspire Defence project for which we adopted ASC Topic 606 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 earnings in the balance sheet as 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, Derivatives 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. The adoption of this ASU 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.
Effective January 1, 2019, we adopted ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). Under the new standard, we did not elect to reclassify the income tax effects stranded in AOCL to retained earnings as a result of the enactment of comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act of 2017. Therefore, the adoption of this ASU had no impact on financial statements.
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 3two core business segments, Government Solutions and Sustainable Technology Solutions and Energy Solutions,
and 2one 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, C5ISR, cyber analytics, space domain awareness, test and evaluation, systems integration and program
management; management, global supply chain management and operations readiness and support. With the acquisition of Frazer-Nash Consultancy Limited ("Frazer-Nash") on October 20, 2021, we expanded our broad range of professional advisory services that deliver high-end systems engineering, systems assurance and technology to operationscustomers across the defense, renewable energy and critical infrastructure sectors within the U.K. Additionally, with the acquisition of VIMA Group ("VIMA") on August 2, 2022, we deliver solutions across a number of large-scale, high priority digital transformation programs to support maintenanceour clients in ensuring availability of effective digital and field logistics. Our acquisitionsinformation technology as described inguided by the U.K.'s Digital Strategy for Defence. See Note 4 to ourthe consolidated financial statements have been fully integrated with our existing operations.for further information related to the Frazer-Nash and VIMA acquisitions.
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 accelerate and catalyst supplyenable energy transition across the industrial base in four primary verticals: ammonia/syngas, chemical/petrochemicals, clean refining and associated knowledge-basedcircular process/circular economy solutions. STS also provides highly synergistic services into a global business for refining, petrochemicals, inorganicincluding advisory and specialty chemicalsconsulting focused on broad-based energy transition and net-zero carbon emission solutions, high-end engineering, design and program
management centered around decarbonization, energy efficiency, environmental impact and asset optimization, as well as gasification, syngas, ammonia, nitric acidour digitally-enabled operating and fertilizers. Frommonitoring solutions. Through early planning throughand scope definition, advanced technologies and projectfacility life-cycle support,optimization, 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 | 2022 | | 2021 | | 2020 |
| Revenues: | | | | | |
| Government Solutions | $ | 5,320 | | | $ | 6,149 | | | $ | 4,055 | |
| Sustainable Technology Solutions | 1,244 | | | 1,190 | | | 1,712 | |
| Total revenues | $ | 6,564 | | | $ | 7,339 | | | $ | 5,767 | |
| | | | | |
| Equity in earnings (losses) of unconsolidated affiliates: | | | | | |
| Government Solutions | 27 | | | 29 | | | 28 | |
| Sustainable Technology Solutions | (107) | | | (199) | | | 2 | |
| Total equity in earnings (losses) of unconsolidated affiliates | $ | (80) | | | $ | (170) | | | $ | 30 | |
| | | | | |
| Operating income: | | | | | |
| Government Solutions | $ | 441 | | | $ | 414 | | | $ | 355 | |
| Sustainable Technology Solutions | 47 | | | (30) | | | (77) | |
| Other | (145) | | | (153) | | | (221) | |
| Total operating income | $ | 343 | | | $ | 231 | | | $ | 57 | |
|
| | | | | | | | | | | |
| | 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 | 2022 | | 2021 | | 2020 |
| Capital expenditures: | | | | | |
| Government Solutions | $ | 52 | | | $ | 18 | | | $ | 13 | |
| Sustainable Technology Solutions | 7 | | | 2 | | | 3 | |
| Other | 12 | | | 10 | | | 4 | |
| Total | $ | 71 | | | $ | 30 | | | $ | 20 | |
| Depreciation and amortization: | | | | | |
| Government Solutions | $ | 95 | | | $ | 108 | | | $ | 60 | |
| Sustainable Technology Solutions | 14 | | | 16 | | | 26 | |
| Other | 28 | | | 22 | | | 29 | |
| Total | $ | 137 | | | $ | 146 | | | $ | 115 | |
|
| | | | | | | | | | | |
| | 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:
Energy Solutions
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 | 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 |
|
85
| | | | | | | | | | | |
| | December 31, |
| Dollars in millions | 2022 | | 2021 |
| Total assets: | | | |
| Government Solutions | $ | 3,735 | | | $ | 4,245 | |
| Sustainable Technology Solutions | 915 | | | 1,145 | |
| Other | 916 | | | 814 | |
| Total | $ | 5,566 | | | $ | 6,204 | |
| Goodwill (Note 9): | | | |
| Government Solutions | $ | 1,918 | | | $ | 1,890 | |
| Sustainable Technology Solutions | 169 | | | 170 | |
| | | |
| Total | $ | 2,087 | | | $ | 2,060 | |
| Equity in and advances to related companies (Note 10): | | | |
| Government Solutions | $ | 75 | | | $ | 126 | |
| Sustainable Technology Solutions | 113 | | | 450 | |
| | | |
| Total | $ | 188 | | | $ | 576 | |
Selected Geographic Information
Revenues by country are determined based on the location of services provided. Long-lived assets by country are determined based on the location of tangible assets.
| | | | | | | | | | | |
| | December 31, |
| Dollars in millions | 2022 | | 2021 |
| Property, plant & equipment, net: | | | |
| United States | $ | 103 | | | $ | 70 | |
| United Kingdom | 41 | | | 49 | |
| Other | 38 | | | 17 | |
| Total | $ | 182 | | | $ | 136 | |
|
| | | | | | | | | | | |
| | Years ended December 31, |
| Dollars in millions | 2019 | | 2018 | | 2017 |
| Revenues: | | | | | |
| United States | $ | 2,705 |
| | $ | 2,260 |
| | $ | 1,986 |
|
| Middle East | 1,027 |
| | 884 |
| | 836 |
|
| Europe | 1,058 |
| | 989 |
| | 480 |
|
| Australia | 288 |
| | 329 |
| | 334 |
|
| Canada | 39 |
| | 21 |
| | 224 |
|
| Africa | 197 |
| | 133 |
| | 121 |
|
| Asia | 214 |
| | 190 |
| | 125 |
|
| Other countries | 111 |
| | 107 |
| | 65 |
|
| Total | $ | 5,639 |
| | $ | 4,913 |
| | $ | 4,171 |
|
|
| | | | | | | |
| | 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 | | | | | 2022 | | 2021 | | 2020 | | | | | | |
| | | | | | | | | | | | | | | |
| Government Solutions | | | | | | | | | | | | | | | |
| Science & Space | | | | | $ | 1,055 | | | $ | 1,018 | | | $ | 967 | | | | | | | |
| Defense & Intel | | | | | 1,509 | | | 1,475 | | | 959 | | | | | | | |
| Readiness & Sustainment | | | | | 1,639 | | | 2,644 | | | 1,153 | | | | | | | |
| International | | | | | 1,117 | | | 1,012 | | | 976 | | | | | | | |
| Total Government Solutions | | | | | 5,320 | | | 6,149 | | | 4,055 | | | | | | | |
| | | | | | | | | | | | | | | |
| Sustainable Technology Solutions | | | | | 1,244 | | | 1,190 | | | 1,712 | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total revenue | | | | | $ | 6,564 | | | $ | 7,339 | | | $ | 5,767 | | | | | | | |
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, Defense & Intel and 2018, respectively.Readiness & Sustainment. 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, 2022 |
| | | | | | | | | |
Dollars in millions | Government Solutions | | Sustainable Technology Solutions | | | | | | Total |
| United States | $ | 3,264 | | | $ | 469 | | | | | | | $ | 3,733 | |
| Europe | 1,351 | | | 216 | | | | | | | 1,567 | |
| Middle East | 157 | | | 249 | | | | | | | 406 | |
| Australia | 392 | | | 45 | | | | | | | 437 | |
| | | | | | | | | |
| Africa | 86 | | | 63 | | | | | | | 149 | |
| Asia | 14 | | | 154 | | | | | | | 168 | |
| Other countries | 56 | | | 48 | | | | | | | 104 | |
| Total revenue | $ | 5,320 | | | $ | 1,244 | | | | | | | $ | 6,564 | |
|
| | | | | | | | | | | | | | | | | | | |
| | 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, 2021 |
| | | | | | | | | |
Dollars in millions | Government Solutions | | Sustainable Technology Solutions | | | | | | Total |
| United States | $ | 4,493 | | | $ | 430 | | | | | | | $ | 4,923 | |
| Europe | 762 | | | 223 | | | | | | | 985 | |
| Middle East | 393 | | | 197 | | | | | | | 590 | |
| Australia | 351 | | | 16 | | | | | | | 367 | |
| | | | | | | | | |
| Africa | 87 | | | 92 | | | | | | | 179 | |
| Asia | 7 | | | 192 | | | | | | | 199 | |
| Other countries | 56 | | | 40 | | | | | | | 96 | |
| Total revenue | $ | 6,149 | | | $ | 1,190 | | | | | | | $ | 7,339 | |
| | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| | | | | | | | | |
Dollars in millions | Government Solutions | | Sustainable Technology Solutions | | | | | | Total |
| United States | $ | 2,280 | | | $ | 751 | | | | | | | $ | 3,031 | |
| Europe | 743 | | | 218 | | | | | | | 961 | |
| Middle East | 622 | | | 235 | | | | | | | 857 | |
| Australia | 272 | | | 52 | | | | | | | 324 | |
| | | | | | | | | |
| Africa | 81 | | | 71 | | | | | | | 152 | |
| Asia | — | | | 203 | | | | | | | 203 | |
| Other countries | 57 | | | 182 | | | | | | | 239 | |
| Total revenue | $ | 4,055 | | | $ | 1,712 | | | | | | | $ | 5,767 | |
Many of our contracts contain bothcost reimbursable, time-and-materials and fixed price and cost reimbursable components. We define contract type based on the component that represents the majority of the contract. Revenue by contract type was as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | 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, 2022 |
| | | | | |
| Dollars in millions | Government Solutions | | Sustainable Technology Solutions | | Total |
| Cost Reimbursable | $ | 3,293 | | | $ | — | | | $ | 3,293 | |
| Time-and-Materials | 973 | | | 770 | | | $ | 1,743 | |
| Fixed Price | 1,054 | | | 474 | | | $ | 1,528 | |
| Total revenue | $ | 5,320 | | | $ | 1,244 | | | $ | 6,564 | |
|
| | | | | | | | | | | | | | | | | | | |
| | 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, 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, 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 | |
Performance Obligations
Changes in estimates are recognized on a cumulative catch-up basis in the current period associated with performance obligations satisfied in a prior period due to the release of a constrained milestone, modification in contract price or scope or a change in the likelihood of a contingency being resolved. We recognized revenue of $15 million from performance obligations satisfied in previous periods for such matters of $49 million, $19 million and $49 million for the yearyears ended December 31, 2019.2022, 2021 and 2020, respectively.
On December 31, 2019,2022, we had $11.4$11.2 billion of transaction price allocated to remaining performance obligations. We expect to recognize approximately 34%37% of our remaining performance obligations as revenue within one year, 33%35% in years two through five and 33%28% 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 havehas contract terms extending through 2041 and 2023, respectively. The balance of remaining2041. Remaining performance obligations doesdo not include variable consideration that was determined to be constrained as of December 31, 2019.2022.
Contract Assets and Contract Liabilities
Contract assets were $252 million and $224 million and contract liabilities were $275 million and $313 million, at December 31, 2022 and 2021, 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 $201 million for the year ended December 31, 2022, which was previously included in the contract liability balance at December 31, 2021.
Accounts Receivable
| | | | | | | | | | | |
| December 31, |
| Dollars in millions | 2022 | | 2021 |
| Unbilled | $ | 486 | | | $ | 698 | |
| Trade & other | 456 | | | 713 | |
| Accounts receivable, net | $ | 942 | | | $ | 1,411 | |
The decrease in accounts receivable, net is attributed to significant cash collections in early 2022 from unbilled amounts and accounts receivable associated with the OAW program as of December 31, 2021.
Note 4. Acquisitions and Dispositions
Stinger Ghaffarian Technologies AcquisitionVIMA Group
On April 25, 2018,August 2, 2022, we acquired 100% of the outstanding stock of SGT. SGT isVIMA Group, a U.K.-based leading provider of high-value engineering, missiondigital transformation solutions to defense and other public sector clients. VIMA Group is reported within our GS business segment. We accounted for this transaction as an acquisition of a business using the acquisition method under Business Combinations (Topic 805).
The agreed-upon purchase price for the acquisition was $82 million. The purchase price consisted of cash paid on hand at closing of $75 million, subject to certain working capital and other closing adjustments, $4 million of deferred consideration and contingent consideration with an estimated fair value of $3 million that was contingent upon the achievement of certain performance targets from closing through December 31, 2022. As the targets were not met, no consideration was paid and we recorded a benefit of $3 million in our consolidated statements of operations scientificfor the year ended December 31, 2022. We
recognized $2 million as an intangible backlog asset, $11 million in customer relationships, $3 million in net working capital, $2 million in deferred income tax liability and IT software solutions$68 million of goodwill arising from the acquisition, which relates primarily to future growth opportunities. As of December 31, 2022, the estimated fair values of net assets acquired were preliminary. For U.S. tax purposes, the transaction is treated as a stock deal. As a result, there is no step-up in tax basis in the governmentindividual assets and liabilities acquired and the goodwill recognized is not deductible for tax purposes.
Frazer-Nash Consultancy Limited
On October 20, 2021, we acquired Frazer-Nash in accordance with an agreement with Babcock International Group PLC, a leading UK based provider of specialist systems, engineering and technology solutions. The acquired business of Frazer-Nash provides innovative engineering and technology related professional advisory services market.across the defense, energy and critical infrastructure sectors primarily in the 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.Combinations, Topic (805). 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.
The purchase price allocation for the business combination is final. 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 | 6 | |
| Operating lease right-of-use assets | 6 | |
| Intangible assets | 89 | |
| |
| |
| Total assets | 146 | |
| |
| Accounts payable | 14 | |
| |
| |
| |
| Other current liabilities | 6 | |
| Total current liabilities | 20 | |
| |
| Deferred income taxes | 21 | |
| Operating lease liabilities | 6 | |
| |
| Total liabilities | 47 | |
| |
| Net assets acquired | 99 | |
| Goodwill | $ | 293 | |
The goodwill recognized of $293 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 Business Combinations (Topic 805). 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 was paid out early upon settlement of other items with management during the fourth quarter of 2022. 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. The estimated fair values of net assets acquired are final. 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 to our consolidated financial statements for more information on our Senior Credit Facility and Senior Notes and Note 22 to our consolidated financial statements for further discussion of our sale of receivables.
During the years ended December 31, 2022, 2021 and 2020, the Company recognized direct, incremental costs related to this acquisition of $2$1 million, $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. 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 | 18 | |
| Operating lease right-of-use assets | 36 | |
| Intangible assets | 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 Business Combinations (Topic 805). 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 (1) | | 2020 (1) |
| (Unaudited) |
| Revenue | $ | 7,465 | | | $ | 6,317 | |
| Net income attributable to KBR | $ | 37 | | | $ | (55) | |
| Diluted earnings per share | $ | 0.26 | | | $ | 0.39 | |
(1) As adjusted for the adoption of ASU 2020-06 using the full retrospective method.
|
| | | | | | | |
| | 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 Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash 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 expectThis cash is expected to use this cashbe used for project costs and distributions of earnings.
The components of our cash and cash equivalents balance are as follows:
| | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| Dollars in millions | International (a) | | Domestic (b) | | Total |
| Operating cash and cash equivalents | $ | 251 | | | $ | 25 | | | $ | 276 | |
| Short-term investments (c) | 4 | | | 2 | | | 6 | |
| Cash and cash equivalents held in consolidated joint ventures and Aspire Defence subcontracting entities | 99 | | | 8 | | | 107 | |
| Total | $ | 354 | | | $ | 35 | | | $ | 389 | |
|
| | | | | | | | | | | |
| | 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, 2021 |
| Dollars in millions | International (a) | | Domestic (b) | | Total |
| Operating cash and cash equivalents | $ | 218 | | | $ | 34 | | | $ | 252 | |
| Short-term investments (c) | 2 | | | — | | | 2 | |
| Cash and cash equivalents held in consolidated joint ventures and Aspire Defence subcontracting entities | 116 | | | — | | | 116 | |
| Total | $ | 336 | | | $ | 34 | | | $ | 370 | |
| |
(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. |
(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 |
|
| | | | | | | | | | | |
| Dollars in millions | 2022 | | 2021 |
| Amounts included in project estimates-at-completion at January 1, | $ | 426 | | | $ | 1,048 | |
| Net decrease in project estimates | (114) | | | (228) | |
| Approved change orders | (271) | | | (374) | |
| Foreign currency impact | 7 | | | (20) | |
| | | |
| Amounts included in project estimates-at-completion at December 31, | $ | 48 | | | $ | 426 | |
AsThe balance as of December 31, 2019 and 2018, the predominant component of change orders, customer claims and estimated recoveries of claims against suppliers and subcontractors above2022 primarily relates to projects in our 30% proportionate share of unapproved change orders and claims associated with the Ichthys LNG Project discussed below.Government Solutions segment.
KBR intends to vigorously pursue approval and collection of amounts still due under unapproved 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. These commercial matters may not be resolved in the near term. Our current estimates for the above unapproved change orders, client claims 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.
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, suppliers and other third parties as further described below.Client
Unapproved Change Orders and Claims Against Client
Under the cost-reimbursable scope of the contract with the client,In October 2021, JKC has entered into commercial contracts with multiple suppliersa binding settlement agreement (the “Settlement Agreement”) that resolved the outstanding claims 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 any amounts paid or payable to the suppliers and subcontractors in settlement of their contract claims related to the cost-reimbursable scope are an adjustment to the contract price, and accordingly JKC has made claims for contract price adjustments under the cost-reimbursable scope of the contractdisputes between JKC and its client. However,client, Ichthys LNG Pty, Ltd (collectively, “the Parties”). As a result of the client disputed some of these contract price adjustments and subsequently withheld certain payments. In order to facilitateSettlement Agreement, the continuation of work under the contract while JKC worked to resolve this dispute, the clientParties agreed to a contractual mechanism (“Funding Deed”) in 2016 providing funding inwithdraw all claims and terminate all ongoing arbitration and court proceedings between 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 has 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 required to refund sums funded by the client under the termsParties. As part of the Funding Deed. We, along with our joint venture partners, are jointlySettlement Agreement, KBR’s letters of credit were also reduced to $82 million from $164 million.
Paint and severally liable to the client for any amounts required to be refunded.Insulation Claims Against Insurer and Paint Manufacturer
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.
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. The client consented to these settlements and paid for them but reserved its contractual rights. In reliance, JKC in turn settled these claims with the associated suppliers and subcontractors. The formal contract price adjustments for these settlements remained pending at December 31, 2019. However, unlike amounts funded under the Funding Deed, there is no requirement to refund these amounts to the client by a certain date.
In October 2018, JKC received a favorable ruling from an arbitration tribunal related to the Funding Deeds. The ruling determined a contract interpretation in JKC's favor, to the effect that delay and disruption costs payable to subcontractors under the cost-reimbursable scope 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 recognized unapproved change orders as of December 31, 2019. Our view is that the arbitration ruling resolves our obligations under the Funding Deeds and settlements with reimbursable subcontractors. However, the client does not agree with the impact of the arbitration award and, accordingly, we have initiated a new proceeding to obtain further determination from the arbitration tribunal.
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 a provision for this contingent liability.
Settlement Agreement with the Combined Cycle Power Plant Subcontractor Consortium
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 complete the Consortium's work, which significantly exceeds 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 pursuingpursued 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. damages.
In April 2018,2022, JKC prevailed inentered into a legal actionsettlement agreement (the “Subcontractor Settlement Agreement”) to call bank guarantees (bonds)resolve outstanding claims and received funds totaling $52 million. Eachdisputes between JKC and the Consortium. As a result of the Consortium partners has jointSubcontractor Settlement Agreement, JKC received the first payment of AUD 270 million in April 2022. In May 2022, JKC distributed the payment to KBR at current exchange rates and several liability with respect to all obligations undernet of legal expenses resulting in the subcontract. JKC intends to pursue recoveryreceipt 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 probableapproximately $190 million. The second payment 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. AmountsAUD 90 million is expected to be recovered from the Consortium are includedpaid to JKC in March 2023. KBR recorded a non-cash charge to equity in earnings (losses) of unconsolidated affiliates in the table above.
Asamount of December 31, 2019,$137 million during the first quarter of 2022, which reflected KBR’s proportionate share of JKC's claims against the Consortium that were approximately $1.9 billion for recovery of JKC's costs. Hearings on the arbitration will take place in May and August of 2020 (the "Arbitration"). JKC also initiated suit against the parent companies of the Consortium members to seek a declaration that the parents either had to perform and finish the work or pay for the completion of the power plant based on their payment and performance guarantees. In May 2019, the court ruled against the declaration and JKC's appeal is pending from the court.no longer collectible.
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 to our consolidated financial statements for further discussion regarding our equity method investment in JKC.
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 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 the year ended December 31, 2022 within our STS business segment, we recognized a non-cash charge to equity in earnings of unconsolidated affiliates of $137 million as a result of changes in estimates on the Ichthys LNG Project in connection with the Subcontractor Settlement Agreement discussed above. Additionally, during the year ended December 31, 2022, we recorded a charge to equity in earnings of unconsolidated affiliates on a joint venture acquired from a historical GS acquisition of $10 million based on our funding obligations of projected losses. This joint venture was divested in the fourth quarter of 2022.
Sanctions and trade control measures were implemented against Russia due to the ongoing conflict between Russia and Ukraine. These measures impact our ability to operate in the region and during 2022 we continued to carry out efforts to wind down our operations in Russia. As we wind down, we are settling or ending contract relationships with suppliers and personnel and have included the estimates of such activities within our remaining project estimates. These estimates may change as we continue to assess revisions to these estimates when known. The duration and extent to which the trade sanctions against Russia affect our business will depend on future developments that remain uncertain. During the year ended December 31, 2022, we recognized an unfavorable change of $16 million in gross profit and incurred $6 million in severance and asset impairments costs associated with our winding down of operations in Russia.
During the 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.
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 $59designed to refine our market focus, optimize costs and improve operational efficiencies. The restructuring charges were substantially completed in the year ended December 31, 2020.
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 | |
We recorded restructuring charges and asset impairments of $5 million and $98$2 million for the year ended December 31, 2022 and December 31, 2021, respectively. The restructuring liability at December 31, 2022 was $52 million, of which $13 million is included in other current liabilities and $39 million is included in other liabilities. 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.
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 | | 2022 | | 2021 |
| Land | N/A | | $ | 4 | | | $ | 5 | |
| Buildings and property improvements | 1-35 | | 120 | | | 131 | |
| Equipment and other | 1-25 | | 475 | | | 431 | |
| Total | | | 599 | | | 567 | |
| Less accumulated depreciation | | | (417) | | | (431) | |
| Net property, plant and equipment | | | $ | 182 | | | $ | 136 | |
Property, plant and equipment includes approximately $40 million and $39 million of equipment and other assets under finance lease obligations as of December 31, 20192022, and 2018,2021, 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 $40 million, $42 million and $73$36 million as offor the years ended December 31, 20192022, 2021 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.
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, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | |
| Dollars in millions | Government Solutions | | Sustainable Technology Solutions | | Total |
| | | | | |
| | | | | |
| | | | | |
| 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 January 1, 2022 | $ | 1,890 | | | $ | 170 | | | $ | 2,060 | |
| Goodwill acquired during the period (Note 4) | 68 | | | — | | | 68 | |
| | | | | |
| | | | | |
| | | | | |
| Foreign currency translation | (40) | | | (1) | | | (41) | |
| Balance as of December 31, 2022 | $ | 1,918 | | | $ | 169 | | | $ | 2,087 | |
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, 2022 |
| Weighted Average Remaining Useful Lives | | Intangible Assets, Gross | | Accumulated Amortization | | Intangible Assets, Net |
| Trademarks/trade names | Indefinite | | $ | 50 | | | $ | — | | | $ | 50 | |
| Customer relationships | 13 | | 548 | | | (153) | | | 395 | |
| Developed technologies | 19 | | 78 | | | (41) | | | 37 | |
| Contract backlog | 18 | | 278 | | | (124) | | | 154 | |
| Other | 14 | | 23 | | | (14) | | | 9 | |
| Total intangible assets | | | $ | 977 | | | $ | (332) | | | $ | 645 | |
| | | | | | | |
| 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 | 14 | | 25 | | | (15) | | | 10 | |
| Total intangible assets | | | $ | 999 | | | $ | (291) | | | $ | 708 | |
|
| | | | | | | | | | | | | |
| 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 ifDuring the carrying valueyears ended December 31, 2022 and December 31, 2021, no triggering events were identified. In 2020, in connection with the energy 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 Energy Solutions 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 | 2022 | | 2021 | | 2020 |
| Intangibles amortization expense | $ | 50 | | | $ | 66 | | | $ | 42 | |
|
| | | | | | | | | | | |
| | 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 |
| 2023 | $ | 45 | |
| 2024 | $ | 42 | |
| 2025 | $ | 42 | |
| 2026 | $ | 42 | |
| 2027 | $ | 42 | |
| Beyond 2027 | $ | 382 | |
|
| | | |
| 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 | 2022 | | 2021 |
| Beginning balance at January 1, | $ | 576 | | | $ | 881 | |
| | | |
| | | |
| Equity in earnings (losses) of unconsolidated affiliates (a) | (80) | | | (170) | |
| Distributions of earnings of unconsolidated affiliates (b) | (53) | | | (72) | |
| Payments from unconsolidated affiliates, net | (14) | | | (17) | |
| (Return of) investments in equity method investment, net (c) | (198) | | | 29 | |
| | | |
| Sale of equity method investment (d) (a) | (31) | | | (39) | |
| Foreign currency translation adjustments | (15) | | | (10) | |
| Other (e) | 3 | | | (26) | |
| | | |
| | | |
| | | |
| Balance at December 31, | $ | 188 | | | $ | 576 | |
(a)During 2022 and 2021, non-cash charges of $137 million and $203 million, respectively, were recorded for settlement agreements associated with the Ichthys LNG project. Additionally, during the third quarter of 2022, we recorded a charge against a joint venture acquired from a historical GS acquisition of $10 million based on our funding obligations of projected losses. In the fourth quarter of 2022, we divested this joint venture and recorded an incremental loss on sale of $3 million. The remaining equity in earnings (losses) of unconsolidated affiliates in 2022 and 2021 is related to normal activities within our other joint ventures.
(b)BRIS declared a distribution in the fourth quarter of 2021 that was paid to KBR in January 2022. In the fourth quarter of 2022, BRIS and KZJV declared dividends that were not paid to KBR until January 2023.
(c)During the year ended December 31, 2022, we received a return of investment from JKC of approximately $190 million related to the Subcontractor Settlement Agreement, offset by $1 million in funding contributions to JKC. Additionally, we received a return of investment distribution from BRIS of $10 million as our cumulative distributions from inception of the joint venture exceeded our cumulative earnings. For the year ended December 31, 2021, investments include $26 million in contributions to JKC.
(d)During the first quarter of 2022, we sold two of our four U.K. Road investments. The carrying value of our investment was $22 million. We received $18 million in cash proceeds and the purchaser agreed to assume the $4 million of consortium relief. In the second quarter of 2022, we sold an additional U.K. Road investment with a carrying value of $19 million and recorded a gain of approximately $16 million upon receipt of $35 million in cash proceeds, in addition to receipt of $2 million of deferred consideration from the Q1 2022 sales. 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 the 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 | 2022 | | 2021 |
| Current assets | $ | 1,576 | | | $ | 2,382 | |
| Noncurrent assets | 1,717 | | | 2,996 | |
| Total assets | $ | 3,293 | | | $ | 5,378 | |
| | | |
| Current liabilities | $ | 1,105 | | | $ | 955 | |
| Noncurrent liabilities | 1,914 | | | 2,652 | |
| Total liabilities | $ | 3,019 | | | $ | 3,607 | |
Statements of Operations
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| Dollars in millions | 2022 | | 2021 | | 2020 |
| Revenues | $ | 3,175 | | | $ | 1,294 | | | $ | 2,032 | |
| | | | | |
| Operating income (loss) | $ | (325) | | | $ | (650) | | | $ | 54 | |
| Net income (loss) | $ | (321) | | | $ | (698) | | | $ | 28 | |
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 recorded on 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, 2022 |
| Dollars in millions | Total Assets | | Total Liabilities | | |
| Affinity joint venture (U.K. MFTS project) | $ | 9 | | | $ | 3 | | | |
| Aspire Defence Limited | $ | 87 | | | $ | 7 | | | |
| JKC joint venture (Ichthys LNG project) | $ | 15 | | | $ | — | | | |
| U.K. Road project joint ventures | $ | — | | | $ | — | | | |
| Plaquemines LNG project | $ | 23 | | | $ | 36 | | | |
| | | | | |
| | | | | | | | | | | | | |
| Dollars in millions | December 31, 2021 |
| 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 | | | $ | — | | | |
| Plaquemines LNG project | $ | — | | | $ | — | | | |
| | | | | |
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, 2022.
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. We account for our interest in Aspire Defence Limited using the equity method of accounting. As of December 31, 2022, included in our GS segment, our assets and liabilities associated with our investment in this project, within our consolidated balance sheets, were $87 million and $7 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 less unearned revenues to be provided to these entities as of December 31, 2022.
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 was 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, 2022, our assets and liabilities associated with our investment in JKC recorded in our consolidated balance sheets under our STS business segment were $15 million and $0 million, respectively. These assets include estimated recoveries of claims against suppliers and insurers. See Note 6 to our consolidated financial statements for further discussion on claims related to this project.
U.K. Road projects. We were 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 had a 25% ownership interest in each of these joint ventures and accounted for them using the equity method of accounting. The joint ventures obtained financing through third parties that was nonrecourse to the joint venture partners. These joint ventures were VIEs included in our GS business segment; however, we were not the primary beneficiary. During the year ended December 31, 2022, we divested three of the U.K. Road projects. At December 31, 2022, we have no assets or liabilities associated with our investment in this project.
Plaquemines LNG project. KZJV is a joint venture with Zachary Group that performs certain design, engineering, procurement and construction-related services for a LNG facility in Plaquemines Parish, Louisiana. KBR owns a 45% interest in KZJV, which is a VIE for which we are joint and several to the client with our joint venture partner. We are not the primary beneficiary as we do not have the power to direct the activities of the VIE that most significantly impact its economic performance. The investment is accounted for within our STS business segment using the equity method of accounting.
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, 2022, 2021 and 2020, our revenues included $413 million, $361 million and $511 million, respectively, related to the services we provided primarily to the Aspire Defence Limited joint venture within our GS business segment and a joint venture within our STS 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, 2022 and 2021 are as follows:
| | | | | | | | | | | |
| | December 31, |
| Dollars in millions | 2022 | | 2021 |
| Accounts receivable, net of allowance for doubtful accounts | $ | 56 | | | $ | 35 | |
| Contract assets (a) | $ | 2 | | | $ | 2 | |
| Other current assets | $ | 12 | | | $ | 25 | |
| Contract liabilities (a) | $ | 39 | | | $ | 5 | |
| | | |
(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, 2022 |
| Total Assets | | Total Liabilities |
| | | |
| Fasttrax Limited (Fasttrax project) | $ | 14 | | | $ | 5 | |
| Aspire Defence subcontracting entities (Aspire Defence project) | $ | 385 | | | $ | 196 | |
| HomeSafe | $ | 31 | | | $ | 19 | |
| | | | | | | | | | | |
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 | |
| HomeSafe | $ | — | | | $ | — | |
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 cash equivalents of $3 million and net property, plant and equipment of approximately $7 million as of December 31, 2022. The total amount of debt outstanding at December 31, 2022 related to our nonrecourse project-finance debt of this VIE consolidated by KBR was $2 million.
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.
HomeSafe. HomeSafe, a KBR led joint venture with Tier One Relocation, was established to be the exclusive provider of household goods move management services for the U.S. Armed Forces, U.S. DoD civilians and their families. KBR owns a 72% interest in HomeSafe. The joint venture is a VIE that is consolidated for financial reporting purposes and is accounted for within our GS business segment. 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.
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 $63$104 million in 2019, $562022, $84 million in 20182021 and $52$83 million in 2017.2020.
Defined Benefit Pension Plans
We have 2two frozen defined benefit pension plans in the U.S., 1one frozen and one active plan in the U.K., and 1one 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 20192022 and 2018.2021. Plan assets, expenses and obligations for our defined benefit pension plans are presented in the following tables.
| | | | | | | | | | | | Overfunded | | Underfunded |
| | United States | | Int’l | | United States | | Int’l | | United States | | Int’l | | United States | | Int’l |
| Dollars in millions | 2019 | | 2018 | Dollars in millions | 2022 |
| Change in projected benefit obligations: | | | | | | | | Change in projected benefit obligations: | | | |
| Projected benefit obligations at beginning of period | $ | 71 |
| | $ | 1,751 |
| | $ | 77 |
| | $ | 2,046 |
| Projected benefit obligations at beginning of period | $ | — | | | $ | 2,066 | | | $ | 74 | | | $ | 35 | |
| Acquisitions | — |
| | — |
| | — |
| | 24 |
| |
| Service cost | — |
| | 2 |
| | — |
| | 2 |
| Service cost | — | | | 1 | | | — | | | 1 | |
| Interest cost | 3 |
| | 50 |
| | 2 |
| | 50 |
| Interest cost | — | | | 34 | | | 2 | | | 1 | |
| Foreign currency exchange rate changes | — |
| | 46 |
| | — |
| | (114 | ) | Foreign currency exchange rate changes | — | | | (220) | | | — | | | (4) | |
| Actuarial (gain) loss | 7 |
| | 214 |
| | (4 | ) | | (184 | ) | |
Actuarial gain(1) | | Actuarial gain(1) | — | | | (614) | | | (12) | | | (12) | |
| Other | — |
| | (1 | ) | | — |
| | — |
| Other | — | | | (1) | | | — | | | — | |
| Plan amendments | — |
| | — |
| | — |
| | 20 |
| |
| Benefits paid | (5 | ) | | (74 | ) | | (4 | ) | | (93 | ) | Benefits paid | — | | | (61) | | | (5) | | | (1) | |
| | Projected benefit obligations at end of period | $ | 76 |
| | $ | 1,988 |
| | $ | 71 |
| | $ | 1,751 |
| Projected benefit obligations at end of period | $ | — | | | $ | 1,205 | | | $ | 59 | | | $ | 20 | |
| Change in plan assets: | | | | | | | | Change in plan assets: | | | | | | | |
| Fair value of plan assets at beginning of period | $ | 54 |
| | $ | 1,518 |
| | $ | 59 |
| | $ | 1,673 |
| Fair value of plan assets at beginning of period | $ | — | | | $ | 1,992 | | | $ | 66 | | | $ | 31 | |
| Acquisitions | — |
| | — |
| | — |
| | 24 |
| |
| Actual return on plan assets | 10 |
| | 200 |
| | (3 | ) | | (28 | ) | Actual return on plan assets | — | | | (539) | | | (9) | | | (12) | |
| Employer contributions | 2 |
| | 43 |
| | 2 |
| | 39 |
| Employer contributions | — | | | 73 | | | — | | | 1 | |
| Foreign currency exchange rate changes | — |
| | 41 |
| | — |
| | (96 | ) | Foreign currency exchange rate changes | — | | | (213) | | | — | | | (3) | |
| Benefits paid | (5 | ) | | (74 | ) | | (4 | ) | | (93 | ) | Benefits paid | — | | | (61) | | | (5) | | | (1) | |
| Other | (1 | ) | | (1 | ) | | — |
| | (1 | ) | Other | — | | | (1) | | | — | | | — | |
| Fair value of plan assets at end of period | $ | 60 |
| | $ | 1,727 |
| | $ | 54 |
| | $ | 1,518 |
| Fair value of plan assets at end of period | $ | — | | | $ | 1,251 | | | $ | 52 | | | $ | 16 | |
| Funded status | $ | (16 | ) | | $ | (261 | ) | | $ | (17 | ) | | $ | (233 | ) | Funded status | $ | — | | | $ | 46 | | | $ | (7) | | | $ | (4) | |
(1) Actuarial gains primarily driven by change in discount rates.
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 | | | | | | | | | | | | | | | | | | | | | | | |
| Overfunded | | Underfunded |
| United States | | Int’l | | United States | | Int’l |
| Dollars in millions | 2021 |
| Change in projected benefit obligations: | | | | | | | |
| Projected benefit obligations at beginning of period | $ | — | | | $ | — | | | $ | 80 | | | $ | 2,326 | |
| | | | | | | |
| Service cost | — | | | — | | | — | | | 3 | |
| Interest cost | — | | | — | | | 2 | | | 33 | |
| Foreign currency exchange rate changes | — | | | — | | | — | | | (4) | |
Actuarial gain(1) | — | | | — | | | (3) | | | (180) | |
| Other | — | | | — | | | — | | | (1) | |
| | | | | | | |
| Benefits paid | — | | | — | | | (5) | | | (75) | |
| Projected benefit obligations at end of period | $ | — | | | $ | — | | | $ | 74 | | | $ | 2,102 | |
| Change in plan assets: | | | | | | | |
| Fair value of plan assets at beginning of period | $ | — | | | $ | — | | | $ | 64 | | | $ | 1,961 | |
| | | | | | | |
| Actual return on plan assets | — | | | — | | | 7 | | | 94 | |
| Employer contributions | — | | | — | | | 1 | | | 47 | |
| Foreign currency exchange rate changes | — | | | — | | | — | | | (3) | |
| Benefits paid | — | | | — | | | (5) | | | (75) | |
| Other | — | | | — | | | (1) | | | (1) | |
| Fair value of plan assets at end of period | $ | — | | | $ | — | | | $ | 66 | | | $ | 2,023 | |
| Funded status | $ | — | | | $ | — | | | $ | (8) | | | $ | (79) | |
(1) Actuarial gains primarily driven by 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.discount rates.
The Accumulated Benefit Obligation ("ABO") is the present value of benefits earned to date. The ABO for our United States pension plans was $76$59 million and $71$74 million as of December 31, 20192022 and 2018,2021, respectively. The ABO for our international pension plans was $2.0$1.2 billion and $1.8$2.1 billion as of December 31, 20192022 and 2018,2021, 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 | 2022 | | 2021 |
| Amounts recognized on the consolidated balance sheets | | | | | | | |
| Other assets | $ | — | | | $ | 46 | | | $ | — | | | $ | 1 | |
| Pension obligations | $ | (7) | | | $ | (4) | | | $ | (8) | | | $ | (80) | |
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 | 2022 | | 2021 | | 2020 |
| Components of net periodic benefit cost | | | | | | | | | | | |
| Service cost | $ | — | | | $ | 2 | | | $ | — | | | $ | 3 | | | $ | — | | | $ | 2 | |
| Interest cost | 2 | | | 35 | | | 2 | | | 33 | | | 2 | | | 39 | |
| Expected return on plan assets | (3) | | | (83) | | | (3) | | | (87) | | | (3) | | | (59) | |
| Prior service cost amortization | — | | | 1 | | | — | | | 1 | | | — | | | 1 | |
| | | | | | | | | | | |
| Recognized actuarial loss | 1 | | | 23 | | | 2 | | | 31 | | | 2 | | | 22 | |
| Net periodic (benefit) cost | $ | — | | | $ | (22) | | | $ | 1 | | | $ | (19) | | | $ | 1 | | | $ | 5 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 20192022 and 2018,2021, 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 | 2022 | | 2021 |
| Unrecognized actuarial loss, net of tax of $8 and $195, $8 and $198, respectively | $ | 16 | | | $ | 552 | | | $ | 17 | | | $ | 564 | |
| Total in accumulated other comprehensive loss | $ | 16 | | | $ | 552 | | | $ | 17 | | | $ | 564 | |
Estimated amounts that will be amortized from accumulated other comprehensive income, net of tax, intoThe weighted-average assumptions used to determine net periodic benefit cost in 2020 arewere as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| United States | | Int'l | | United States | | Int'l | | United States | | Int'l |
| 2022 | | 2021 | | 2020 |
| Discount rate | 2.45 | % | | 1.80 | % | | 2.00 | % | | 1.40 | % | | 2.89 | % | | 2.05 | % |
| Expected return on plan assets | 5.19 | % | | 4.73 | % | | 5.19 | % | | 4.67 | % | | 5.72 | % | | 3.70 | % |
|
| | | | | | | |
| Dollars in millions | United States | | Int’l |
| Actuarial loss | $ | 1 |
| | $ | 19 |
|
| Total | $ | 1 |
| | $ | 19 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| United States | | Int'l | | United States | | Int'l |
| 2022 | | 2021 |
| Discount rate | 4.91 | % | | 5.00 | % | | 2.45 | % | | 1.80 | % |
|
| | | | | | | | | | | | | | | | | |
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 | % |
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 20202023 is as follows:
| | | | | | | | | | | |
| 2023 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 | % |
The range of targeted asset allocations for our International plans for 20202023 and 2019,2022, by asset class, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| International Plans | 2023 Targeted | | 2022 Targeted |
| | Percentage Range | | Percentage Range |
| | Minimum | | Maximum | | Minimum | | Maximum |
| Equity funds and securities | 20 | % | | 50 | % | | 20 | % | | 50 | % |
| Fixed income funds and securities | 30 | % | | 100 | % | | 30 | % | | 100 | % |
| Hedge funds | — | % | | 7 | % | | — | % | | 7 | % |
| Real estate funds | — | % | | 10 | % | | — | % | | 10 | % |
| Other | — | % | | 35 | % | | — | % | | 34 | % |
|
| | | | | | | | | | | |
| International Plans | 2020 Targeted | | 2019 Targeted |
| | Percentage Range | | Percentage Range |
| | Minimum | | Maximum | | Minimum | | Maximum |
| Equity funds and securities | 1 | % | | 50 | % | | 1 | % | | 60 | % |
| Fixed income funds and securities | 35 | % | | 100 | % | | — | % | | 99 | % |
| Hedge funds | — | % | | 22 | % | | — | % | | 34 | % |
| Real estate funds | — | % | | 20 | % | | — | % | | 10 | % |
| Other | — | % | | 42 | % | | — | % | | 20 | % |
The range of targeted asset allocations for our U.S. plans for 20202023 and 2019,2022, by asset class, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Domestic Plans | 2023 Targeted | | 2022 Targeted |
| | Percentage Range | | Percentage Range |
| | Minimum | | Maximum | | Minimum | | Maximum |
| | | | | | | |
| Equity funds and securities | 41 | % | | 62 | % | | 41 | % | | 62 | % |
| Fixed income funds and securities | 31 | % | | 47 | % | | 31 | % | | 47 | % |
| Real estate funds | 1 | % | | 1 | % | | 1 | % | | 1 | % |
| Other | 7 | % | | 10 | % | | 7 | % | | 10 | % |
|
| | | | | | | | | | | |
| Domestic Plans | 2020 Targeted | | 2019 Targeted |
| | Percentage Range | | Percentage Range |
| | Minimum | | Maximum | | Minimum | | Maximum |
| Equity funds and securities | 41 | % | | 68 | % | | 50 | % | | 53 | % |
| Fixed income funds and securities | 31 | % | | 47 | % | | 37 | % | | 40 | % |
| Real estate funds | 1 | % | | 1 | % | | 1 | % | | 1 | % |
| Other | 7 | % | | 10 | % | | 9 | % | | 9 | % |
ASC 820 - Fair Value Measurement addresses fair value measurements and disclosures, defines fair value, establishes a framework for using fair value to measure assets and liabilities and expands disclosures about fair value measurements. This standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. ASC 820 establishes a three-tier value hierarchy, categorizing the inputs used to measure fair value. The inputs and methodology used for valuing securities are not an indication of the risk associated with investing in those securities. The following isRefer to Note 22 "Financial Instruments and Risk Management" for a description of the primary valuation methodologies and classification used for assets measured at fair value.
Fair values of our Level 1 assets are based on observable inputs such as unadjusted quoted prices for identical assets in active markets. These consist of securities valued at the closing price reported on the active market on which the individual securities are traded.
Fair values of our Level 2 assets are based on inputs other than the quoted prices in active markets that are observable either directly or indirectly, such as quoted prices for similar assets; quoted prices that are in inactive markets; inputs other than quoted prices that are observable for the asset; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Fair values of our Level 3 assets are based on unobservable inputs in which there is little or no market data and require us to develop our own assumptions.
A summary of total investments for KBR’s defined benefit pension plan assets measured at fair value is presented below.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at Reporting Date |
| Dollars in millions | Total | | Level 1 | | Level 2 | | Level 3 |
| Asset Category at December 31, 2022 | | | | | | | |
| United States plan assets | | | | | | | |
| Investments measured at net asset value (a) | $ | 52 | | | $ | — | | | $ | — | | | $ | — | |
| Cash and equivalents | — | | | — | | | — | | | — | |
| Total United States plan assets | $ | 52 | | | $ | — | | | $ | — | | | $ | — | |
| International plan assets | | | | | | | |
| Equities | $ | 60 | | | $ | — | | | $ | — | | | $ | 60 | |
| Fixed income | — | | | — | | | — | | | — | |
| Real estate | 1 | | | — | | | — | | | 1 | |
| Cash and cash equivalents | 31 | | | 31 | | | — | | | — | |
| Other | 52 | | | — | | | — | | | 52 | |
| Investments measured at net asset value (a) | 1,123 | | | — | | | — | | | — | |
| Total international plan assets | $ | 1,267 | | | $ | 31 | | | $ | — | | | $ | 113 | |
| Total plan assets at December 31, 2022 | $ | 1,319 | | | $ | 31 | | | $ | — | | | $ | 113 | |
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements at Reporting Date |
| Dollars in millions | Total | | Level 1 | | Level 2 | | Level 3 |
| Asset Category at December 31, 2019 | | | | | | | |
| United States plan assets | | | | | | | |
| Investments measured at net asset value (a) | $ | 59 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Cash and equivalents | 1 |
| | 1 |
| | — |
| | — |
|
| Total United States plan assets | $ | 60 |
| | $ | 1 |
| | $ | — |
| | $ | — |
|
| International plan assets | | | | | | | |
| Equities | $ | 103 |
| | $ | — |
| | $ | — |
| | $ | 103 |
|
| Fixed income | 1 |
| | — |
| | — |
| | 1 |
|
| Real estate | 2 |
| | — |
| | — |
| | 2 |
|
| Cash and cash equivalents | 2 |
| | 2 |
| | — |
| | — |
|
| Other | 87 |
| | 44 |
| | — |
| | 43 |
|
| Investments measured at net asset value (a) | 1,532 |
| | — |
| | — |
| | — |
|
| Total international plan assets | $ | 1,727 |
| | $ | 46 |
| | $ | — |
| | $ | 149 |
|
| Total plan assets at December 31, 2019 | $ | 1,787 |
| | $ | 47 |
| | $ | — |
| | $ | 149 |
|
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements at Reporting Date |
| Dollars in millions | Total | | Level 1 | | Level 2 | | Level 3 |
| Asset Category at December 31, 2018 | | | | | | | |
| United States plan assets | | | | | | | |
| Investments measured at net asset value (a) | $ | 54 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Total United States plan assets | $ | 54 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| International plan assets | | | | | | | |
| Equities | $ | 84 |
| | $ | — |
| | $ | — |
| | $ | 84 |
|
| Fixed income | 2 |
| | — |
| | — |
| | 2 |
|
| Real estate | 1 |
| | — |
| | — |
| | 1 |
|
| Cash and cash equivalents | 8 |
| | 8 |
| | — |
| | — |
|
| Other | 74 |
| | 35 |
| | — |
| | 39 |
|
| Investments measured at net asset value (a) | 1,349 |
| | — |
| | — |
| | — |
|
| Total international plan assets | $ | 1,518 |
| | $ | 43 |
| | $ | — |
| | $ | 126 |
|
| Total plan assets at December 31, 2018 | $ | 1,572 |
| | $ | 43 |
| | $ | — |
| | $ | 126 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at Reporting Date |
| Dollars in millions | Total | | Level 1 | | Level 2 | | Level 3 |
| Asset Category at December 31, 2021 | | | | | | | |
| United States plan assets | | | | | | | |
| Investments measured at net asset value (a) | $ | 65 | | | $ | — | | | $ | — | | | $ | — | |
| Cash and equivalents | $ | 1 | | | $ | 1 | | | $ | — | | | $ | — | |
| Total United States plan assets | $ | 66 | | | $ | 1 | | | $ | — | | | $ | — | |
| International plan assets | | | | | | | |
| Equities | $ | 88 | | | $ | — | | | $ | — | | | $ | 88 | |
| Fixed income | — | | | — | | | — | | | — | |
| Real estate | 1 | | | — | | | — | | | 1 | |
| Cash and cash equivalents | 6 | | | 6 | | | — | | | — | |
| Other | 48 | | | — | | | — | | | 48 | |
| Investments measured at net asset value (a) | 1,880 | | | — | | | — | | | — | |
| Total international plan assets | $ | 2,023 | | | $ | 6 | | | $ | — | | | $ | 137 | |
| Total plan assets at December 31, 2021 | $ | 2,089 | | | $ | 7 | | | $ | — | | | $ | 137 | |
(a) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheet.
The fair value measurement of plan assets using significant unobservable inputs (Level 3) changed each year due to the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dollars in millions | Total | | Equities | | Fixed Income | | Real Estate | | Other |
| International plan assets | | | | | | | | | |
| Balance as of December 31, 2020 | $ | 151 | | | $ | 108 | | | $ | 1 | | | $ | 2 | | | $ | 40 | |
| Return on assets held at end of year | (15) | | | (21) | | | — | | | (1) | | | 7 | |
| Return on assets sold during the year | 38 | | | 36 | | | — | | | — | | | 2 | |
| Purchases, sales and settlements | (37) | | | (35) | | | (1) | | | — | | | (1) | |
| | | | | | | | | |
| Foreign exchange impact | — | | | — | | | — | | | — | | | — | |
| Balance as of December 31, 2021 | $ | 137 | | | $ | 88 | | | $ | — | | | $ | 1 | | | $ | 48 | |
| Return on assets held at end of year | 11 | | | 7 | | | — | | | — | | | 4 | |
| Return on assets sold during the year | 5 | | | — | | | — | | | — | | | 5 | |
| Purchases, sales and settlements, net | (26) | | | (26) | | | — | | | — | | | — | |
| | | | | | | | | |
| Foreign exchange impact | (14) | | | (9) | | | — | | | — | | | (5) | |
| Balance as of December 31, 2022 | $ | 113 | | | $ | 60 | | | $ | — | | | $ | 1 | | | $ | 52 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| Dollars in millions | Total | | Equities | | Fixed Income | | Real Estate | | Other |
| International plan assets | | | | | | | | | |
| Balance as of December 31, 2017 | $ | 74 |
| | $ | 26 |
| | $ | 5 |
| | $ | 3 |
| | $ | 40 |
|
| Return on assets held at end of year | (3 | ) | | 1 |
| | — |
| | (1 | ) | | (3 | ) |
| Return on assets sold during the year | 8 |
| | — |
| | — |
| | 1 |
| | 7 |
|
| Purchases, sales and settlements | 39 |
| | 11 |
| | (3 | ) | | (2 | ) | | 33 |
|
| Transfers | 13 |
| | 48 |
| | — |
| | — |
| | (35 | ) |
| Foreign exchange impact | (5 | ) | | (2 | ) | | — |
| | — |
| | (3 | ) |
| Balance as of December 31, 2018 | $ | 126 |
| | $ | 84 |
| | $ | 2 |
| | $ | 1 |
| | $ | 39 |
|
| Return on assets held at end of year | 8 |
| | 10 |
| | — |
| | — |
| | (2 | ) |
| Return on assets sold during the year | 1 |
| | — |
| | — |
| | 1 |
| | — |
|
| Purchases, sales and settlements, net | 11 |
| | 7 |
| | (1 | ) | | — |
| | 5 |
|
| Transfers | — |
| | — |
| | — |
| 48,000,000 |
| — |
| 48 |
| — |
|
| Foreign exchange impact | 3 |
| | 2 |
| | — |
| | — |
| | 1 |
|
| Balance as of December 31, 2019 | $ | 149 |
| | $ | 103 |
| | $ | 1 |
| | $ | 2 |
| | $ | 43 |
|
Contributions. Funding requirements for each plan are determined based on the local laws of the country where such plans reside. In certain countries the funding requirements are mandatory while in other countries they are discretionary. We expect to contribute $47$8 million to our pension plans in 2020.2023. On October 17, 2022, we made an advance payment to our U.K. pension plan for approximately £29 million of the £33 million required minimum annual contributions for the year ending December 31, 2023.
Benefit payments. The following table presents the expected benefit payments over the next 10 years.
| | | | | | | | | | | |
| | Pension Benefits |
| Dollars in millions | United States | | Int’l |
| 2023 | $ | 5 | | | $ | 59 | |
| 2024 | $ | 5 | | | $ | 62 | |
| 2025 | $ | 5 | | | $ | 64 | |
| 2026 | $ | 5 | | | $ | 66 | |
| 2027 | $ | 5 | | | $ | 68 | |
| Years 2028 - 2032 | $ | 22 | | | $ | 373 | |
|
| | | | | | | |
| | Pension Benefits |
| Dollars in millions | United States | | Int’l |
| 2020 | $ | 5 |
| | $ | 57 |
|
| 2021 | $ | 5 |
| | $ | 59 |
|
| 2022 | $ | 5 |
| | $ | 60 |
|
| 2023 | $ | 5 |
| | $ | 61 |
|
| 2024 | $ | 5 |
| | $ | 63 |
|
| Years 2025 - 2029 | $ | 24 |
| | $ | 333 |
|
Multiemployer Pension Plans
We participate in multiemployer plans in Canada. Generally, the plans provide defined benefits to substantially all employees covered by collective bargain agreements. Under the terms of these agreements, our obligations are discharged upon plan contributions and are not subject to any assessments for unfunded liabilities upon our termination or withdrawal.
Our aggregate contributions to these plans were immaterial in 2019 and 2018, and $3 million in 2017. At December 31, 2019, none of the plans in which we participate is individually significant to our consolidated financial statements.
Deferred Compensation Plans
Our Elective Deferral Plan is a nonqualified deferred compensation program that provides benefits payable to officers, certain key employees or their designated beneficiaries and non-employee directors at specified future dates, upon retirement, or death. The elective deferral plan is unfunded except for $10$12 million and $8$13 million of mutual funds designated for a portion of our employee deferral plan included in "Other assets"other assets on our consolidated balance sheets at December 31, 20192022 and 2018,2021, respectively. The mutual funds are measured at fair value using Level 1 inputs under ASC 820 and may be liquidated in the near term without restrictions. Our obligations under our employee deferred compensation plan were $65$57 million and $67$64 million as of December 31, 20192022 and 2018,2021, respectively, and are included in "Employeeemployee compensation and benefits"benefits in our consolidated
balance sheets.
Note 12. Debt and Other Credit Facilities
Our outstanding debt consisted of the following at the dates indicated:
| | | | | | | | | | | |
| Dollars in millions | December 31, 2022 | | December 31, 2021 (1) |
| | | |
| | | |
| Term Loan A | 398 | | | 441 | |
| Term Loan B | 506 | | | 511 | |
| Convertible Senior Notes | 350 | | | 350 | |
| Senior Notes | 250 | | | 250 | |
| Senior Credit Facility | 260 | | | 364 | |
| Unamortized debt issuance costs - Term Loan A | (9) | | | (4) | |
| Unamortized debt issuance costs and discount - Term Loan B | (10) | | | (13) | |
| Unamortized debt issuance costs and discount - Convertible Senior Notes | (2) | | | (4) | |
| Unamortized debt issuance costs and discount - Senior Notes | (3) | | | (4) | |
| Total debt | 1,740 | | | 1,891 | |
| Less: current portion | 364 | | | 16 | |
| Total long-term debt, net of current portion | $ | 1,376 | | | $ | 1,875 | |
(1) As adjusted for the adoption of ASU 2020-06 using the full retrospective method
Senior Credit Facility
On May 17, 2022, we entered into Amendment No. 6 under our existing Credit Agreement, dated as of April 25, 2018, consisting of a $1 billion revolving credit facility (the "Revolver"), a $442 million Term Loan A, ("Term Loan A") with debt tranches denominated in U.S. 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 ("Senior Credit Facility"). Amendment No. 6 (i) removes certain provisions requiring that the net cash proceeds received from the Subcontractor Settlement Agreement be applied to prepay principal amounts owed under Term Loan A and (ii) amends a certain provision to permit KBR to apply such net cash proceeds for working capital and other general corporate purposes. See Note 6 "Unapproved Change Orders and Claims Against Clients and Estimated Recoveries of Claims Against Suppliers and Subcontractors" for additional information regarding the Subcontractor Settlement Agreement.
On December 30, 2022, we entered into Amendment No. 7 under our existing Credit Agreement, dated as of April 25, 2018, to replace the Australian dollar tranche of Term Loan A with new term loans with an aggregate principal amount of $99 million ("2022 Refinancing Term Loan A tranche") after deducting estimated deferred financing fees and foreign exchange conversion. The amendment redenominates the original loans in the Australian dollar tranche from Australian dollars into U.S. dollars and establishes SOFR as the reference borrowing rate for such loans.
On February 6, 2023, we entered into Amendment No. 8 under our existing Credit Agreement, dated as of April 25, 2018, to (i) replace the LIBOR-based reference borrowing rate with a SOFR-based reference borrowing rate for the U.S. dollar tranche of Term Loan A and the Revolving Credit Loans under our existing Credit Agreement and (ii) implement the Company’s recent fiscal year change from a calendar year ending on December 31 to a 52-53 week year ending on the Friday closest to December 31, effective beginning with fiscal year 2023.
The interest rates with respect to the Revolver and Term Loan A are based on, at the Company's option, the respective adjusted reference rate plus an additional margin or base rate plus additional margin. The interest rate with respect to the Term Loan B is LIBOR plus 2.75%. Additionally, there is a commitment fee with respect to the Revolver.
The details of the applicable margins and commitment fees under the amended Senior Credit Facility are based on the Company's consolidated net leverage ratio as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | Revolver and Term Loan A | | | | |
| Consolidated Net Leverage Ratio | | Reference Rate (a) | | Base Rate | | | | Commitment Fee |
| Greater than or equal to 4.25 to 1.00 | | 2.25 | % | | 1.25 | % | | | | 0.33 | % |
| Less than 4.25 to 1.00 but greater than or equal to 3.25 to 1.00 | | 2.00 | % | | 1.00 | % | | | | 0.30 | % |
| Less than 3.25 to 1.00 but greater than or equal to 2.25 to 1.00 | | 1.75 | % | | 0.75 | % | | | | 0.28 | % |
| Less than 2.25 to 1.00 but greater than or equal to 1.25 to 1.00 | | 1.50 | % | | 0.50 | % | | | | 0.25 | % |
| Less than 1.25 to 1.00 | | 1.25 | % | | 0.25 | % | | | | 0.23 | % |
(a)The reference rate for the Revolver, the original U.S. dollar tranche and the 2022 Refinancing Term Loan A tranche is SOFR plus 10 bps Credit Spread Adjustment and the British pound sterling tranche is SONIA.
Term Loan A provides for quarterly principal payments of 0.625% of the aggregate principal amount that commenced with the fiscal quarter ended March 31, 2022, increasing to 1.25% starting with the quarter ending March 31, 2024. Term Loan B provides for quarterly principal payments of 0.25% of the initial aggregate principal amounts that commenced with the fiscal quarter ended June 30, 2020.
The Senior Credit Facility contains financial covenants of a maximum consolidated net leverage ratio and a consolidated interest coverage ratio (as such terms are defined in the Senior Credit Facility). Our consolidated net leverage ratio as of the last day of any fiscal quarter may not exceed 4.50 to 1 through 2022, reducing to 4.25 to 1 in 2023 and 4.00 to 1 in 2024 and thereafter. Our consolidated interest coverage ratio may not be less than 3.00 to 1 as of the last day of any fiscal quarter. As of December 31, 2022, we were in compliance with our financial covenants related to our debt agreements.
Convertible Senior Notes
Convertible Senior Notes. On November 15, 2018, we issued and sold $350 million of 2.50% Convertible Senior Notes due 2023 (the "Convertible Notes") pursuant to an indenture between us and Citibank, N.A., as trustee. The Convertible Notes are senior unsecured obligations and bear interest at 2.50% per year, and interest is payable on May 1 and November 1 of each year. The Convertible Notes mature on November 1, 2023 and may not be redeemed by us prior to maturity. As such, the Convertible Notes are classified as current liabilities on our consolidated balance sheets as of December 31, 2022.
The Convertible Notes are convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. The initial conversion price of the Convertible Notes was approximately $25.51 (subject to adjustment in certain circumstances), based on the initial conversion rate of 39.1961 Common Shares per $1,000 principal amount of Convertible Notes. Prior to May 1, 2023, the Convertible Notes will be convertible only upon the occurrence of certain events and during certain periods, and thereafter, until the close of business on the second scheduled trading day immediately preceding the maturity date. On October 18, 2022, we declared a quarterly cash dividend of $0.12 per Common Share, which exceeded our per share dividend threshold and adjusted the conversion rate to 39.5772 at a strike price of $25.27.
Convertible Notes Call Spread Overlay. Concurrent with the issuance of the Convertible Notes, we entered into privately negotiated convertible note hedge transactions (the "Note Hedge Transactions") and warrant transactions (the "Warrant Transactions") with the option counterparties. These transactions represent a call spread overlay, whereby the cost of the Note Hedge Transactions we purchased to cover the cash outlay upon conversion of the Convertible Notes was reduced by the sales price of the Warrant Transactions. Each of these transactions is described below.
The Note Hedge Transactions cost an aggregate of $62 million and are expected generally to reduce the potential dilution of common stock and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the Convertible Notes in the event that the market price of our common stock is greater than the strike price of the Note Hedge Transactions, which was initially $25.51 (subject to adjustment), corresponding approximately to the initial conversion price of the Convertible Notes. The Note Hedge Transactions were accounted for by recording the cost as a reduction to PIC based on the Note Hedge Transactions meeting certain scope exceptions provided under ASC Topic 815.
We received proceeds of $22 million for the Warrant Transactions, in which we sold net-share-settled warrants to the option counterparties in an amount equal to the number of shares of our common stock initially underlying the Convertible Notes, subject to customary anti-dilution adjustments. The original strike price of the warrants was $40.02 per share. The updated strike price as of December 31, 2022 was $39.63. The Warrant Transactions have been accounted for by recording the proceeds received as PIC.
The Note Hedge Transactions and the Warrant Transactions are separate transactions, in each case entered into by us with the option counterparties, and are not part of the terms of the Convertible Notes and will not affect any holder's rights under the Convertible Notes.
As of December 31, 2022, the if-converted value of the Convertible Notes based on the closing share price exceeded the $350 million principal amount by approximately $381 million. The incremental value over the principal amount would be fully offset by the shares we are allowed to purchase under the Note Hedge Transaction. However, the counterparties holding the warrants would have the right to purchase the same number of shares we would receive at a strike price of $39.63 resulting in value of $182 million that would have been delivered to the counterparties as of December 31, 2022.
Senior Notes
On September 30, 2020, we issued and sold $250 million aggregate principal amount of 4.750% Senior Notes due 2028 (the "Senior Notes") pursuant to an indenture among us, the guarantors party thereto and Citibank, N.A., as trustee. The Senior Notes are senior unsecured obligations and are fully and unconditionally guaranteed by each of our existing and future domestic subsidiaries that guarantee our obligations under the Senior Credit Facility and certain other indebtedness. The net proceeds from the offering were approximately $245 million, after deducting fees and estimated offering expenses and were used to finance a portion of the purchase price for the acquisition of Centauri and pay related fees and expenses. Interest is payable semi-annually in arrears on March 30 and September 30 of each year, beginning on March 30, 2021, and the principal is due on September 30, 2028.
At any time prior to September 30, 2023, we may redeem all or part of the Senior Notes at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed, plus accrued and unpaid interest, if any, to (but not including) the redemption date, plus a specified “make-whole premium.” On or after September 30, 2023, we may redeem all or part of the Senior Notes at our option, at the redemption prices set forth in the Senior Notes, plus accrued and unpaid interest, if any, to (but not including) the redemption date. At any time prior to September 30, 2023, we may redeem up to 35% of the original aggregate principal amount of the Senior Notes with the net cash proceeds of certain equity offerings at a redemption price equal to 104.750% of the principal amount of the Senior Notes, together with accrued and unpaid interest, if any, to (but not including) the redemption date. If we undergo a change of control, we may be required to make an offer to holders of the Senior Notes to repurchase all of the Senior Notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest.
Letters of credit, surety bonds and guarantees
In connection with certain projects, we are required to provide letters of credit, surety bonds or guarantees to our customers in the ordinary course of business as credit support for contractual performance guarantees, advanced payments received from customers and future funding commitments. As of December 31, 2022, we had $1 billion in a committed line of credit under the Senior Credit Facility and $449 million of uncommitted lines of credit to support the issuance of letters of credit. As of December 31, 2022, with respect to our Senior Credit Facility, we had $260 million of outstanding borrowings previously issued to fund the acquisition of Centauri and $47 million of outstanding letters of credit. With respect to our $449
million of uncommitted lines of credit, we had utilized $248 million for letters of credit as of December 31, 2022. The total remaining capacity of these committed and uncommitted lines of credit was approximately $894 million. Of the letters of credit outstanding under the Senior Credit Facility, none have expiry dates beyond the maturity date of the Senior Credit Facility. Of the total letters of credit outstanding, $85 million relate to our joint venture operations where the letters of credit are posted using our capacity to support our pro-rata share of obligations under various contracts executed by joint ventures of which we are a member.
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. Amounts that may be required to be paid in excess of the estimated costs to complete contracts in progress are not estimable. 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.
Note 13. Income Taxes
The United States and foreign components of income (loss) before income taxes and noncontrolling interests were as follows:
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| Dollars in millions | 2022 | | 2021 (1) | | 2020(1) |
| United States | $ | 138 | | | $ | 177 | | | $ | (197) | |
| Foreign: | | | | | |
| United Kingdom | 161 | | | 56 | | | 76 | |
| Australia | (103) | | | (199) | | | 37 | |
| Canada | — | | | (2) | | | (2) | |
| Middle East | 16 | | | 39 | | | 69 | |
| Africa | 7 | | | 3 | | | 4 | |
| Other | 65 | | | 72 | | | (1) | |
| Subtotal | 146 | | | (31) | | | 183 | |
| Total | $ | 284 | | | $ | 146 | | | $ | (14) | |
(1) As adjusted for the adoption of ASU 2020-06 using the full retrospective method.
The total income taxes included in the statements of operations and in shareholders' equity were as follows:
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| Dollars in millions | 2022 | | 2021 (1) | | 2020(1) |
| (Provision) benefit for income taxes | $ | (92) | | | $ | (111) | | | $ | (28) | |
| Shareholders' equity, foreign currency translation adjustment | — | | | (1) | | | 1 | |
| Shareholders' equity, pension and post-retirement benefits | (4) | | | (44) | | | 26 | |
| Shareholders' equity, changes in fair value of derivatives | (11) | | | (7) | | | 3 | |
| Total income taxes | $ | (107) | | | $ | (163) | | | $ | 2 | |
(1) As adjusted for the adoption of ASU 2020-06 using the full retrospective method.
The components of the provision for income taxes were as follows:
| | | | | | | | | | | | | | | | | |
| Dollars in millions | Current | | Deferred | | Total |
| Year ended December 31, 2022 | | | | | |
| Federal | $ | (10) | | | $ | (7) | | | $ | (17) | |
| Foreign | (36) | | | (26) | | | (62) | |
| State and other | (9) | | | (4) | | | (13) | |
| Provision for income taxes | $ | (55) | | | $ | (37) | | | $ | (92) | |
| | | | | |
| Year ended December 31, 2021 | | | | | |
| Federal | $ | (1) | | | $ | (28) | | | $ | (29) | |
| Foreign | (49) | | | (22) | | | (71) | |
| State and other | (14) | | | 3 | | | (11) | |
| Provision for income taxes | $ | (64) | | | $ | (47) | | | $ | (111) | |
| | | | | |
| Year ended December 31, 2020 | | | | | |
| Federal | $ | — | | | $ | 27 | | | $ | 27 | |
| Foreign | (62) | | | 11 | | | (51) | |
| State and other | (4) | | | — | | | (4) | |
| (Provision) benefit for income taxes | $ | (66) | | | $ | 38 | | | $ | (28) | |
The components of our total foreign income tax provision were as follows:
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| Dollars in millions | 2022 | | 2021 | | 2020 |
| United Kingdom | $ | (29) | | | $ | (22) | | | $ | (14) | |
| Australia | (13) | | | (23) | | | (6) | |
| Canada | — | | | — | | | (1) | |
| Middle East | (8) | | | (9) | | | (18) | |
| Africa | — | | | — | | | — | |
| Other | (12) | | | (17) | | | (12) | |
| Foreign provision for income taxes | $ | (62) | | | $ | (71) | | | $ | (51) | |
Our effective tax rates on income from operations differed from the statutory U.S. federal income tax rate of 21% as a result of the following:
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 2022 | | 2021 (1) | | 2020(1) |
| U.S. statutory federal rate, expected (benefit) provision | 21 | % | | 21 | % | | 21 | % |
| Increase (reduction) in tax rate from: | | | | | |
| Tax impact from foreign operations | 1 | % | | — | % | | 3 | % |
| Noncontrolling interests and equity earnings | 8 | % | | 38 | % | | (5) | % |
| State and local income taxes, net of federal benefit | 2 | % | | 2 | % | | — | % |
| Other permanent differences, net | 4 | % | | 4 | % | | 11 | % |
| Contingent liability accrual | 2 | % | | 1 | % | | 3 | % |
| U.S. taxes on foreign unremitted earnings | — | % | | 1 | % | | (2) | % |
| Change in federal and foreign valuation allowance | (2) | % | | (4) | % | | — | % |
| Research and development credits, net of provision | (6) | % | | — | % | | — | % |
| Non-deductible goodwill and restructuring charges | — | % | | — | % | | (231) | % |
| U.K. statutory rate change | 2 | % | | 13 | % | | — | % |
| Effective tax rate on income from operations | 32 | % | | 76 | % | | (200) | % |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
(1) As adjusted for the adoption of ASU 2020-06 using the full retrospective method.
The primary components of our deferred tax assets and liabilities were as follows:
| | | | | | | | | | | |
| | Years ended December 31, |
| Dollars in millions | 2022 | | 2021 (1) |
| Deferred tax assets: | | | |
| Employee compensation and benefits | $ | 65 | | | $ | 88 | |
| Foreign tax credit carryforwards | 186 | | | 200 | |
| | | |
| Loss carryforwards | 121 | | | 111 | |
| Research and development and other credit carryforwards | 49 | | | 27 | |
| Insurance accruals | 9 | | | 10 | |
| Allowance for credit losses | 3 | | | 4 | |
| Lease obligation and accrued liabilities | 85 | | | 82 | |
| Contract liabilities | 21 | | | 35 | |
| Capitalized research expenditures | 18 | | | — | |
| Other | 57 | | | 61 | |
| Total gross deferred tax assets | 614 | | | 618 | |
| Valuation allowances | (217) | | | (204) | |
| Net deferred tax assets | 397 | | | 414 | |
| Deferred tax liabilities: | | | |
| | | |
| Right-of-use assets | (39) | | | (37) | |
| Intangible amortization | (96) | | | (103) | |
| Indefinite-lived intangible amortization | (82) | | | (72) | |
| Other | (59) | | | (41) | |
| Total gross deferred tax liabilities | (276) | | | (253) | |
| Deferred income tax (liabilities) assets, net | $ | 121 | | | $ | 161 | |
(1) As adjusted for the adoption of ASU 2020-06 using the full retrospective method.
The valuation allowance for deferred tax assets was $217 million and $204 million at December 31, 2022 and 2021, respectively. The net change in the total valuation allowance was an increase of $13 million in 2022 and a decrease of $16 million in 2021. The change in 2022 was mainly driven by additional net operating losses generated from the finalized
2021 state filings. This increase was partially offset by the additional utilization of previously valued foreign tax credits in the U.S. and the liquidation of several non-U.S. entities in 2022 that held valuation allowances.
The valuation allowance balance atDecember 31, 2022 is primarily related to foreign tax credit carryforwards and foreign and state net operating loss carryforwards that, in the judgment of management, are not more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers 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 on the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), income available from carryback years, projected future taxable income and tax-planning strategies in making this assessment.
Income related to the U.S. branches totaled $56 million, $56 million and $68 million for the fiscal years 2022, 2021, and 2020, respectively, and is included in the foreign component of income in the notes to our consolidated financial statements.
The total income (loss) related to the U.S., inclusive of branches and exclusive of non-recurring restructuring and impairment charges, totaled $194 million, $221 million and $(26) million for the fiscal years 2022, 2021, and 2020, respectively.
We concluded that future taxable income and the reversal of deferred tax liabilities, excluding those associated with indefinite-lived intangible assets, were the only sources of taxable income available in determining the amount of valuation allowance to be recorded against our deferred tax assets. The deferred tax liabilities we relied on are projected to reverse in the same jurisdiction and are of the same character as the temporary differences that gave rise to the deferred tax assets. The deferred tax liabilities are projected to reverse in the same periods as the deferred tax assets and are projected to reverse beginning in fiscal year 2023 through fiscal year 2030. We estimated future taxable income by jurisdiction exclusive of reversing temporary differences and carryforwards and applied our foreign tax credit carryforwards based on the sourcing and character of those estimates and considered any limitations.
Our ability to utilize the unreserved foreign tax credit carryforwards is based on our ability to generate income from foreign sources of at least $557 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 at least $676 million. While our current projections of taxable income exceed these amounts, changes in our forecasted taxable income in the applicable taxing jurisdictions within the carryforward periods could affect the ultimate realization of deferred tax assets and our valuation allowance.
The net deferred tax balance by major jurisdiction after valuation allowance as of December 31, 2022 was as follows:
| | | | | | | | | | | | | | | | | |
| Dollars in millions | Net Gross Deferred Asset (Liability) | | Valuation Allowance | | Deferred Asset (Liability), net |
| United States | $ | 366 | | | $ | (188) | | | $ | 178 | |
| United Kingdom | (79) | | | (1) | | | (80) | |
| Australia | 13 | | | — | | | 13 | |
| Canada | 21 | | | (19) | | | 2 | |
| Other | 17 | | | (9) | | | 8 | |
| Total | $ | 338 | | | $ | (217) | | | $ | 121 | |
At December 31, 2022, the amount of gross tax attributes available prior to the offset with related uncertain tax positions were as follows:
| | | | | | | | | | | |
| |
| Dollars in millions | December 31, 2022 | | Expiration |
| Foreign tax credit carryforwards | $ | 186 | | | 2023-2029 |
| Foreign net operating loss carryforwards | $ | 123 | | | 2023-2042 |
| Foreign net operating loss carryforwards | $ | 31 | | | Indefinite |
| State net operating loss carryforwards | $ | 1,660 | | | Various |
| Research and development and other credit carryforwards | $ | 49 | | | 2023-2042 |
We provide for taxes on accumulated and current E&P on certain foreign subsidiaries. As of December 31, 2022, the cumulative amount of permanently reinvested foreign earnings is $1.9 billion. These previously unremitted earnings have been subject to U.S. tax. However, these undistributed earnings could be subject to additional taxes (withholding and/or state taxes) if remitted, or deemed remitted, as a dividend. The tax effects of remitting earnings, if any, are recognized when plan on remitting these earnings. 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 that may include acquisitions around the world.
The Inflation Reduction Act was signed into law by the President on August 16, 2022, which enacts a 15% corporate minimum tax effective in 2023 for C-Corporations with book profits greater than $1 billion and imposes a 1% tax on the fair market value of stock repurchases by a publicly traded U.S. corporation after December 31, 2022, which will be accounted for separately from income taxes when incurred. The Inflation Reduction Act also creates or extends certain tax-related energy incentives. KBR currently does not expect the tax-related provision of the Inflation Reduction Act to have a material impact on our financial results.
A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | |
| Dollars in millions | 2022 | | 2021 | | 2020 |
| Balance at January 1, | $ | 89 | | | $ | 96 | | | $ | 97 | |
| Increases related to current year tax positions | 8 | | | — | | | 1 | |
| | | | | |
| Increases related to prior year tax positions | 1 | | | — | | | 6 | |
| Decreases related to prior year tax positions | (2) | | | (4) | | | (7) | |
| Settlements | — | | | — | | | — | |
| Lapse of statute of limitations | (2) | | | (2) | | | (3) | |
| Other, primarily due to exchange rate fluctuations affecting non-U.S. tax positions | (2) | | | (1) | | | 2 | |
| Balance at December 31, | $ | 92 | | | $ | 89 | | | $ | 96 | |
The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was approximately $78 million as of December 31, 2022. The difference between this amount and the amounts reflected in the tabular reconciliation above relates primarily to deferred income tax benefits on uncertain tax positions. In the next twelve months, it is reasonably possible that our uncertain tax positions could change by approximately $34 million due to settlements with tax authorities and the expirations of statutes of limitations.
We recognize accrued interest and penalties related to uncertain tax positions in income tax expense in our consolidated statements of operations. Our accrual for interest and penalties was $34 million and $31 million as of December 31, 2022 and 2021, respectively. During the years ended December 31, 2022, 2021 and 2020 we recognized net interest and penalty charges of $2 million, $1 million and $4 million related to uncertain tax positions.
KBR is the parent of a group of domestic companies that are members of a U.S. consolidated federal income tax return. We also file income tax returns in various states and foreign jurisdictions. With few exceptions, we are no longer subject to examination by tax authorities for U.S. federal or state and local income tax for years before 2007.
KBR is subject to a tax sharing agreement primarily covering periods prior to the April 2007 separation from Halliburton. The tax sharing agreement provides, in part, that KBR will be responsible for any audit settlements directly attributable to our business activity for periods prior to our separation from our former parent. As of December 31, 2022 and
2021, we have recorded $5 million in other liabilities on our consolidated balance sheets for tax related items under the tax sharing agreement. The balance is not due until receipt by KBR of a future foreign tax credit refund claim filed with the IRS.
Note 14. Commitments and Contingencies
We are a party to litigation and other proceedings that arise in the ordinary course of our business. These types of matters could result in fines, penalties, cost reimbursements or contributions, compensatory or treble damages or non-monetary sanctions or relief. We believe the probability is remote that the outcome of any individual matter, including the matters described below, will have a material adverse effect on the corporation as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings and cash flows in any particular reporting period. Among the factors that we consider in this assessment are the nature of existing legal proceedings and claims, the asserted or possible damages or loss contingency (if estimable), the progress of the case, existing law and precedent, the opinions or views of legal counsel and other advisers, our experience in similar cases and the experience of other companies, the facts available to us at the time of assessment and how we intend to respond to the proceeding or claim. Our assessment of these factors may change over time as individual proceedings or claims progress.
Although we cannot predict the outcome of legal or other proceedings with certainty, when it is probable that a loss will be incurred and the amount is reasonably estimable, U.S. GAAP requires us to accrue an estimate of the probable loss or range of loss. In the event a loss is probable, but the probable loss is not reasonably estimable, we are required to make a statement that such an estimate cannot be made. We follow a thorough process in which we seek to estimate the reasonably possible loss or range of loss, and only if we are unable to make such an estimate do we conclude and disclose that an estimate cannot be made. Accordingly, unless otherwise indicated below in our discussion, a reasonably possible loss or range of loss associated with any individual contingency cannot be estimated.
Chadian Employee Class Action. In May 2018, former employees of our former Chadian subsidiary, Subsahara Services, Inc. ("SSI"), filed a class action suit claiming unpaid damages arising from the ESSO Chad Development Project for Exxon Mobil Corporation ("Exxon") dating back to the early 2000s. Exxon is also named as a defendant in the case. The SSI employees previously filed two class action cases in or around 2005 and 2006 for alleged unpaid overtime and bonuses. The Chadian Labour Court ruled in favor of the SSI employees in the unpaid overtime case resulting in a settlement of approximately $25 million which was reimbursed by Exxon under its contract with SSI. The second case for alleged unpaid bonuses was ultimately dismissed by the Supreme Court of Chad.
The 2018 case claimed $122 million in unpaid bonuses characterized as damages rather than employee bonuses to avoid the previous Chadian Supreme Court dismissal and a 5-year statute of limitations on wage-related claims. SSI’s initial defense was filed and a hearing was held in December 2018. A merits hearing was held in February 2019. In March 2019, the Labour Court issued a decision awarding the plaintiffs approximately $34 million including a $2 million provisional award. Exxon and SSI appealed the award and requested suspension of the provisional award which was approved on April 2, 2019. Exxon and SSI filed a submission to the Court of Appeal on June 21, 2019 and filed briefs at a hearing on February 28, 2020. The plaintiffs failed to file a response on March 13, 2020 and a hearing was scheduled for April 17, 2020. The hearing was postponed due to COVID-19 but took place on September 18, 2020. On October 9, 2020, the appellate court of Moundou awarded the plaintiffs approximately $19 million. SSI filed an appeal of this decision to the Chadian Supreme Court on December 28, 2020. SSI’s request for suspension on the enforceability of the award from the Chadian Supreme Court was granted on January 4, 2021. A hearing took place on December 21, 2021, and while a decision was not issued at the hearing, the Reporting Judge of the Chadian Supreme Court indicated, with regard to the fourth plea concerning the unicity of judicial matters, that this ground alone justified quashing the decision. On February 9, 2022, the Chadian Supreme Court issued an abstract of their forthcoming decision upholding the lower court’s ruling. On June 6, 2022, we received the full decision by the Chadian Supreme Court. We have been informed that Exxon has paid most of the judgment in the amount of 10.1 billion Central African CFA franc to an appointed court bailiff.
At this time, based on our assessment of existing law and precedent, the opinions of legal counsel and other advisers, and the facts available to us at the time of assessment, we do not believe a risk of material loss is probable related to this matter. SSI is no longer an existing entity in Chad or the United States. Further, the amount awarded to the former employees has been paid by Exxon. Therefore, we consider this matter to be resolved.
North West Rail Link Project. We participate in an unincorporated joint venture with two partners to provide engineering and design services in relation to the operations, trains and systems of a metro rail project in Sydney, Australia. The project commenced in 2014 and during its execution encountered delays and disputes resulting in claims and breach notices submitted to the joint venture by the client. Since November 2018, the client has submitted multiple claims alleging breach of
contract and breach of duty by the joint venture in its execution of the services, claiming losses and damages of up to approximately 301 million Australian dollars. KBR has a 33% participation interest in the joint venture and the partners have joint and several liability with respect to all obligations under the contract. We believe the gross amount of the claims significantly exceeds the client’s entitlement as well as the joint venture’s limits of liability under the contract and that the claims will be covered by project-specific professional indemnity insurance subject to deductibles.
As of December 31, 2022, we have accrued a probable and reasonably estimable potential loss in an amount that is immaterial. At this time, fact discovery and expert review are still ongoing. A mediation occurred in November 2022 which did not result in settlement. However, the joint venture, joint venture insurers and client may continue discussions concerning potential resolution of the claims.
Environmental
We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. In the U.S, these laws and regulations include, among others: the Comprehensive Environmental Response, Compensation and Liability Act; the Resources Conservation and Recovery Act; the Clean Air Act; the Clean Water Act and the Toxic Substances Control Act. In addition to federal and state laws and regulations, other countries where we do business often have numerous environmental regulatory requirements by which we must abide in the normal course of our operations. These requirements apply to our business segments where we perform construction and industrial maintenance services or operate and maintain facilities.
Existing or pending climate change legislation, regulations, international treaties or accords are not expected to have a short-term material direct effect on our business, the markets that we serve or on our results of operations or financial position. However, climate change legislation could have a direct effect on our customers or suppliers, which could impact our business. We continue to monitor developments in this area.
Insurance Programs
Our employee-related health care benefits program is self-funded. Our workers’ compensation, automobile and general liability insurance programs include a deductible applicable to each claim. Claims in excess of our deductible are paid by the insurer. The liabilities are based on claims filed and estimates of claims incurred but not reported. As of December 31, 2022, liabilities for anticipated claim payments and incurred but not reported claims for all insurance programs totaled approximately $41 million, comprised of $19 million included in accrued salaries, wages and benefits, $3 million included in other current liabilities and $19 million included in other liabilities all on our consolidated balance sheets. As of December 31, 2021, liabilities for unpaid and incurred but not reported claims for all insurance programs totaled approximately $47 million, comprised of $19 million included in accrued salaries, wages and benefits, $3 million included in other current liabilities and $25 million included in other liabilities all on our consolidated balance sheets.
Note 15. U.S. Government Matters
We provide services to various U.S. governmental agencies, including the U.S. DoD, NASA and the Department of State. The negotiation, administration and settlement of our contracts are subject to audit by the DCAA. The DCAA serves in an advisory role to the DCMA, which is responsible for the administration of the majority of our contracts. The scope of these audits includes, among other things, the validity of direct and indirect incurred costs, provisional approval of annual billing rates, approval of annual overhead rates, compliance with the FAR and CAS, compliance with certain unique contract clauses and audits of certain aspects of our internal control systems. Based on the information received to date, we do not believe any completed or ongoing government audits will have a material adverse impact on our results of operations, financial position or cash flows. The U.S. government also retains the right to pursue various remedies under any of these contracts which could result in challenges to expenditures, suspension of payments, fines and suspensions or debarment from future business with the U.S. government.
The Company accrued for probable and reasonably estimable unallowable costs associated with open government matters related to our GS business in the amounts of $61 million and $76 million for the years ended December 31, 2022, and December 31, 2021, which are recorded in other liabilities on our consolidated balance sheets.
Legacy U.S. Government Matters
Between 2002 and 2011, we provided significant support to the U.S. Army and other U.S. government agencies in support of the war in Iraq under the LogCAP III contract. We have been in the process of closing out the LogCAP III contract since 2011, and we expect the contract closeout process to continue for at least another year. As a result of our work under LogCAP III, there are claims and disputes pending between us and the U.S. government that need to be resolved in order to close the contract. The contract closeout process includes resolving objections raised by the U.S. government through a billing dispute process referred to as Form 1s and MFRs. We continue to work with the U.S. government to resolve these issues and are engaged in efforts to reach mutually acceptable resolutions of these outstanding matters. We also have matters related to ongoing litigation or investigations involving U.S. government contracts. We anticipate billing additional labor, vendor resolution and litigation costs as we resolve the open matters in the future.
Investigations, Qui Tams and Litigation
The following matters relate to ongoing litigation or federal investigations involving U.S. government contracts. Some of these matters involve allegations of violations of the FCA, which prohibits in general terms fraudulent billings to the U.S. government; these suits brought by private individuals are called "qui tams." In the event we prevail in defending these allegations, a majority of our defense costs will be billable under the LogCAP III contract. All costs billed under LogCAP III are subject to audit by the DCAA for reasonableness.
First Kuwaiti Trading Company arbitration. In April 2008, FKTC, one of our LogCAP III subcontractors providing housing containers, filed for arbitration with the American Arbitration Association for several claims under various LogCAP III subcontracts. After a series of arbitration proceedings and related litigation between KBR and the U.S. government, the panel heard the final claims this year and we received an award on July 27, 2022. FKTC filed a motion for correction of the award asking the tribunal to change its findings. The tribunal denied FKTC's motion in an order issued on October 20, 2022. KBR filed its response on February 2, 2023. On January 5, 2023, FKTC filed a motion to vacate the arbitral award in the Eastern District of Virginia Federal District Court. In addition, in March 2022, FKTC filed a new civil action in Kuwait civil court against KBR seeking $100 million in damages. This action is duplicative of the claims decided in arbitration. In September 2022, we filed a motion to dismiss for lack of jurisdiction due to the arbitration agreement between KBR and FKTC. As such, as of December 31, 2022, we continue to maintain an estimated liability in our financial statements.
Howard qui tam. In March 2011, Geoffrey Howard and Zella Hemphill filed a complaint in the U.S. District Court for the Central District of Illinois alleging that KBR mischarged the government $628 million for unnecessary materials and equipment. In October 2014, the DOJ declined to intervene and the case was partially unsealed. KBR and the relators filed various motions including a motion to dismiss by KBR. Although KBR's motion to dismiss was not granted it remains an option on appeal. Fact discovery and expert reports have been completed. We have completed briefing our motion for summary judgment and motions to exclude relators' experts. At the request of the parties, the court ordered a 90-day stay of the proceedings on December 28, 2022. Although we believe the allegations of fraud by the relators are without merit, we intend to participate in mediation prior to trial. Based on our assessment of existing law and precedent, the opinions or views of legal counsel and the facts available to us, we are not able to estimate a reasonably possible loss and accordingly, no amounts have been accrued as of December 31, 2022.
DOJ False Claims Act complaint - Iraq Subcontractor. In January 2014, the DOJ filed a complaint in the U.S. District Court for the Central District of Illinois against KBR and two former KBR subcontractors, including FKTC, alleging that three former KBR employees were offered and accepted kickbacks from these subcontractors in exchange for favorable treatment in the award and performance of subcontracts to be awarded during the course of KBR's performance of the LogCAP III contract in Iraq. The complaint alleges that as a result of the kickbacks, KBR submitted invoices with inflated or unjustified subcontract prices, resulting in alleged violations of the FCA and the Anti-Kickback Act. The DOJ's investigation dates back to 2004. We self-reported most of the violations and tendered credits to the U.S. government as appropriate. In May 2022, the parties reached a settlement and a settlement agreement has been signed. We made the settlement payment of $12 million to the U.S. government in the second quarter of 2022 which was previously fully accrued for in our financial statements. KBR agreed to resolve this case but, as reflected in the settlement, KBR does not admit it has violated any laws, including the False Claims Act, the Anti-Kickback Act or any of the rules and regulations for government contracting. This matter is resolved.
Note 14. Debt16. Claims and Other Credit FacilitiesAccounts Receivable
Our outstanding debt consisted of the following at the dates indicated:
|
| | | | | | | |
| Dollars in millions | December 31, 2019 | | December 31, 2018 |
| Term Loan A | 176 |
| | 190 |
|
| Term Loan B | 756 |
| | 796 |
|
| Convertible Notes | 350 |
| | 350 |
|
| Unamortized debt issuance costs - Term Loan A | (4 | ) | | (5 | ) |
| Unamortized debt issuance costs and discount - Term Loan B | (15 | ) | | (18 | ) |
| Unamortized debt issuance costs and discount - Convertible Notes | (53 | ) | | (65 | ) |
| Total long-term debt | 1,210 |
| | 1,248 |
|
| Less: current portion | 27 |
| | 22 |
|
| Total long-term debt, net of current portion | $ | 1,183 |
| | $ | 1,226 |
|
Senior Credit Facility
The senior secured credit facility ("Senior Credit Facility") consists of a $500Our claims and accounts receivable balance not expected to be collected within the next 12 months was $29 million revolving credit facility ("Revolver"), a $500 million PLOC, a $350 million Delayed Draw Term Loan A, ("Term Loan A") and an $800 million Term Loan B ("Term Loan B"). The Revolver, PLOC and Term Loan A mature in April 2023 and the Term Loan B matures in April 2025. Additional borrowings are no longer available under the Term Loan A. Borrowings under the Term Loan A were used to fund investment contributions in JKC. See Note 8 to our consolidated financial statements for a discussion on JKC.
The interest rates with respect to the Revolver and Term Loan A are based on, at the Company's option, adjusted LIBOR plus an additional margin or base rate plus additional margin. The interest rate with respect to the Term Loan B is LIBOR plus 3.75%. The Senior Credit Facility provides for fees on letters of credit issued under the PLOC at varying rates, as shown below. Additionally, there is a commitment fee with respect to the Revolver, PLOC and Term Loan A. The details of the applicable margins and commitment fees are based on the Company's consolidated leverage ratio as follows:
|
| | | | | | | | | | | | |
| | | Revolver and Term Loan A | | | | |
| Consolidated Leverage Ratio | | LIBOR Margin | | Base Rate Margin | | Performance Letter of Credit Fee | | Commitment Fee |
| Greater than or equal to 4.00 to 1.00 | | 3.25 | % | | 2.25 | % | | 1.95 | % | | 0.450 | % |
| Less than 4.00 to 1.00 but greater than or equal to 3.00 to 1.00 | | 3.00 | % | | 2.00 | % | | 1.80 | % | | 0.400 | % |
| Less than 3.00 to 1.00 but greater than or equal to 2.00 to 1.00 | | 2.75 | % | | 1.75 | % | | 1.65 | % | | 0.375 | % |
| Less than 2.00 to 1.00 | | 2.50 | % | | 1.50 | % | | 1.50 | % | | 0.350 | % |
The Term Loan A provides for quarterly principal payments of 2.50% of the aggregate principal amount commencing with the fiscal quarter ending June 30, 2019. The Term Loan B provides for quarterly principal payments of 0.25% of the initial aggregate principal amounts commencing with the fiscal quarter ending September 30, 2018.
The Senior Credit Facility contains financial maintenance covenants of a maximum consolidated leverage ratio and a consolidated interest coverage ratio (as such terms are defined in the Senior Credit Facility). Our consolidated leverage ratio as of the last day of any fiscal quarter may not exceed 4.50 to 1 and reducing gradually during 2019 and 2020 to 3.50 to 1. Our consolidated interest coverage ratio as of the last day of any fiscal quarter, commencing with the fiscal quarter ending June 30, 2018 and thereafter, may not be less than 3.00 to 1. As of December 31, 2019, we were in compliance with our financial covenants.
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
Convertible Senior Notes. On November 15, 2018, we issued and sold $350 million of 2.50% Convertible Senior Notes due 2023 (the "Convertible Notes") pursuant to an indenture (the "Indenture") between us and Citibank, N.A., as trustee (the "Trustee"). The Convertible Notes are senior unsecured obligations. The Convertible Notes bear interest at 2.50% per year and interest is payable on May 1 and November 1 of each year. The Convertible Notes mature on November 1, 2023 and may not be redeemed by us prior to maturity.
The Convertible Notes are convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. It is our current intent and policy to settle the principal balance of the Convertible Notes in cash and any excess value upon conversion in shares of our common stock. The initial conversion price of the Convertible Notes is approximately $25.51 (subject to adjustment in certain circumstances), based on the initial conversion rate of 39.1961 Common Shares per $1,000 principal amount of Convertible Notes. Prior to May 1, 2023, the Convertible Notes will be convertible only upon the occurrence of certain events and during certain periods, and thereafter, until the close of business on the second scheduled trading day immediately preceding the maturity date. As of December 31, 2019, the "if-converted" value of the Convertible Notes exceeded the $350 million principal amount by approximately $68 million.
Accounting standards require that convertible debt which may be settled in cash upon conversion (including partial cash settlement) be accounted for with a liability component based on the fair value of similar nonconvertible debt and an equity component based on the excess of the initial proceeds from the convertible debt over the liability component. The difference between the principal amount of the notes and the carrying amount represents a debt discount, which is amortized as additional non-cash interest expense over the term of the Convertible Notes. The equity component represents proceeds related to the conversion option and is recorded as additional paid-in capital. The equity component is determined at issuance and is not remeasured as long as it continues to meet the conditions for equity classification. The net carrying value of the equity component related to the Convertible Notes was $57$30 million as of December 31, 20192022, and 2018.
The amount of interest cost recognized relating to the contractual interest coupon was $9 million2021, respectively. Claims and $1 million for the years ended December 31, 2019 and 2018, respectively, and relating to the amortization of the discount and debt issuance costs was $12 million and $1 million for the years ended December 31, 2019 and 2018, respectively. The effective interest rate on the liability component was 6.50% for the years ended December 31, 2019 and 2018.
Convertible Notes Call Spread Overlay - Concurrent with the issuance of the Convertible Notes, we entered into privately
negotiated convertible note hedge transactions (the "Note Hedge Transactions") and warrant transactions (the "Warrant Transactions") with the option counterparties. These transactions represent a Call Spread Overlay, whereby the cost of the Note Hedge Transactions we purchased to cover the cash outlay upon conversion of the Convertible Notes was reduced by the sales price of the Warrant Transactions. Each of these transactions is described below.
The Note Hedge Transactions cost an aggregate $62 million and are expected generally to reduce the potential dilution of
common stock and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the
Convertible Notes in the event that the market price of our common stock is greater than the strike price of the Note Hedge Transactions, which is initially $25.51 (subject to adjustment), corresponding approximately to the initial conversion price of the
Convertible Notes. The Note Hedge Transactions were accounted for by recording the cost as a reduction to "Additional paid-in capital" based on the Note Hedge meeting certain scope exceptions provided under ASC Topic 815.
We received proceeds of $22 million for the Warrant Transactions, in which we sold net-share-settled warrants to the option counterparties in an amount equal to the number of shares of our common stock initially underlying the Convertible Notes, subject to customary anti-dilution adjustments. The strike price of the warrants is $40.02 per share (subject to adjustment), which is 31% above the last reported sale price of our common stock on the New York Stock Exchange on December 31, 2019. The Warrant Transactions could have a dilutive effect to our stockholders to the extent the market price per share of our common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants. The Warrant Transactions have been accounted for by recording the proceeds received as "Additional paid-in capital".
The Note Hedge Transactions and the Warrant Transactions are separate transactions, in each case entered into by us with
the option counterparties, and are not part of the terms of the Convertible Notes and will not affect any holder's rights under the Convertible Notes.
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 expirations dates ranging from mechanical completion of the project being constructed to a period beyond completion in certain circumstances such as for warranties. We have $1 billion in a committed line of credit under our Senior Credit Facility, comprised of the $500 million Revolver and $500 million PLOC. Additionally, we have approximately $368 million of uncommitted lines of credit to support the issuance of letters of credit. Surety bonds are also posted under the terms of certain contracts to guarantee our performance. As of December 31, 2019, with respect to our $500 million Revolver, we have 0 outstanding revolver borrowings and have issued $26 million of letters of credit. With respect to our PLOC, we have $100 million of outstanding letters of credit. With respect to our $368 million of uncommitted lines of credit, we have utilized $199 million for letters of credit as of December 31, 2019. The total remaining capacity of these committed and uncommitted lines of credit is approximately $1.0 billion. Of the letters of credit outstanding under our Senior Credit Facility, none have expiry dates beyond the maturity date of the Senior Credit Facility. Of the total letters of credit outstanding, $170 million relate to our joint venture operations where the letters of credit are posted using our capacity to support our pro-rata share of obligations under various contracts executed by joint ventures of which we are a member.
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. Amounts that may be required to be paid in excess of the estimated costs to complete contracts in progress are not estimable. For cost reimbursable contract, 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.
Nonrecourse Project Debt
Fasttrax Limited, a consolidated joint venture in which we indirectly own a 50% equity interest with an unrelated partner, was awarded a concession contract in 2001 with the U.K. MoD to provide a Heavy Equipment Transporter Service to the British Army. Fasttrax Limited operates and maintains 91 heavy equipment transporters HETs for a term of 22 years. The purchase of the HETs by the joint venture was financed through two series of bonds secured by the assets of Fasttrax Limited and subordinated debt from the joint venture partners. The secured bonds are an obligation of Fasttrax Limited and are not a debt obligation of KBR as they are nonrecourse to the joint venture partners. Accordingly, in the event of a default on the notes, the lenders may only look to the assets of Fasttrax Limited for repayment.
The secured bonds were issued in two classes consisting of Class A 3.5% Index Linked Bonds in the amount of £56 million and Class B 5.9% Fixed Rate Bonds in the amount of £20.7 million. Semi-annual payments on both classes of bonds will continue through maturity in 2021. The subordinated notes payable to each of the partners initially bear interest at 11.25% increasing to 16.00% over the term of the notes until maturity in 2025. For financial reporting purposes, only our partner's portion of the subordinated notes appears in the consolidated financial statements.
The following table summarizes the combined principal installments for both classes of bonds and subordinated notes, including inflation adjusted bond indexation over the next five years and beyond as of December 31, 2019:
|
| | | |
| Dollars in millions | Payments Due |
| 2020 | $ | 11 |
|
| 2021 | $ | 5 |
|
| 2022 | $ | 1 |
|
| 2023 | $ | 1 |
|
| 2024 | $ | — |
|
| Beyond 2024 | $ | — |
|
Note 15. Income Taxes
The United States and foreign components of income (loss) before income taxes and noncontrolling interests were as follows:
|
| | | | | | | | | | | |
| | Years ended December 31, |
| Dollars in millions | 2019 | | 2018 | | 2017 |
| United States | $ | 2 |
| | $ | 44 |
| | $ | 84 |
|
| Foreign: | | | | | |
| United Kingdom | 105 |
| | 203 |
| | 40 |
|
| Australia | 15 |
| | 7 |
| | (30 | ) |
| Canada | 3 |
| | (2 | ) | | 15 |
|
| Middle East | 87 |
| | 61 |
| | 42 |
|
| Africa | 5 |
| | 13 |
| | 20 |
|
| Other | 51 |
| | 70 |
| | 76 |
|
| Subtotal | 266 |
| | 352 |
| | 163 |
|
| Total | $ | 268 |
| | $ | 396 |
| | $ | 247 |
|
The total income taxes included in the statements of operations and in shareholders' equity were as follows:
|
| | | | | | | | | | | |
| | Years ended December 31, |
| Dollars in millions | 2019 | | 2018 | | 2017 |
| (Provision) Benefit for income taxes | $ | (59 | ) | | $ | (86 | ) | | $ | 193 |
|
| Shareholders' equity, foreign currency translation adjustment | 1 |
| | (2 | ) | | 6 |
|
| Shareholders' equity, pension and post-retirement benefits | 11 |
| | (14 | ) | | (27 | ) |
| Shareholders' equity, changes in fair value of derivatives | 2 |
| | 3 |
| | — |
|
| Total income taxes | $ | (45 | ) | | $ | (99 | ) | | $ | 172 |
|
The components of the provision for income taxes were as follows:
|
| | | | | | | | | | | |
| Dollars in millions | Current | | Deferred | | Total |
| Year-ended December 31, 2019 | | | | | |
| Federal | $ | (4 | ) | | $ | 15 |
| | $ | 11 |
|
| Foreign | (67 | ) | | 1 |
| | (66 | ) |
| State and other | (2 | ) | | (2 | ) | | (4 | ) |
| (Provision) benefit for income taxes | $ | (73 | ) | | $ | 14 |
| | $ | (59 | ) |
| | | | | | |
| Year-ended December 31, 2018 | | | | | |
| Federal | $ | (1 | ) | | $ | (6 | ) | | $ | (7 | ) |
| Foreign | (56 | ) | | (20 | ) | | (76 | ) |
| State and other | (2 | ) | | (1 | ) | | (3 | ) |
| Provision for income taxes | $ | (59 | ) | | $ | (27 | ) | | $ | (86 | ) |
| | | | | | |
| Year-ended December 31, 2017 | | | | | |
| Federal | $ | (6 | ) | | $ | 230 |
| | $ | 224 |
|
| Foreign | (122 | ) | | 92 |
| | (30 | ) |
| State and other | (2 | ) | | 1 |
| | (1 | ) |
| (Provision) benefit for income taxes | $ | (130 | ) | | $ | 323 |
| | $ | 193 |
|
The components of our total foreign income tax provision were as follows:
|
| | | | | | | | | | | |
| | Years ended December 31, |
| Dollars in millions | 2019 | | 2018 | | 2017 |
| United Kingdom | $ | (19 | ) | | $ | (32 | ) | | $ | (7 | ) |
| Australia | (6 | ) | | (8 | ) | | 6 |
|
| Canada | (1 | ) | | (6 | ) | | — |
|
| Middle East | (20 | ) | | (16 | ) | | (10 | ) |
| Africa | (1 | ) | | (1 | ) | | 1 |
|
| Other | (19 | ) | | (13 | ) | | (20 | ) |
| Foreign provision for income taxes | $ | (66 | ) | | $ | (76 | ) | | $ | (30 | ) |
Our effective tax rates on income from operations differed from the statutory U.S. federal income tax rate of 21% for 2019 and 2018 and the statutory rate of 35% for 2017 as a result of the following:
|
| | | | | | | | |
| | Years ended December 31, |
| | 2019 | | 2018 | | 2017 |
| U.S. statutory federal rate, expected (benefit) provision | 21 | % | | 21 | % | | 35 | % |
| Increase (reduction) in tax rate from: | | | | | |
| Tax impact from foreign operations | 7 |
| | — |
| | (5 | ) |
| Noncontrolling interests and equity earnings | — |
| | (1 | ) | | (2 | ) |
| State and local income taxes, net of federal benefit | 2 |
| | 1 |
| | 1 |
|
| Other permanent differences, net | 3 |
| | — |
| | (8 | ) |
| Contingent liability accrual | 1 |
| | 3 |
| | (2 | ) |
| U.S. taxes on foreign unremitted earnings | 3 |
| | — |
| | — |
|
| Change in valuation allowance | (10 | ) | | (2 | ) | | (90 | ) |
| Research and development credits, net of provision | (5 | ) | | — |
| | — |
|
| U.S. tax reform | — |
| | — |
| | (7 | ) |
| Effective tax rate on income from operations | 22 | % | | 22 | % | | (78 | )% |
The primary components of our deferred tax assets and liabilities were as follows:
|
| | | | | | | |
| | Years ended December 31, |
| Dollars in millions | 2019 | | 2018 |
| Deferred tax assets: | | | |
| Employee compensation and benefits | $ | 103 |
| | $ | 95 |
|
| Foreign tax credit carryforwards | 257 |
| | 267 |
|
| Loss carryforwards | 96 |
| | 103 |
|
| Insurance accruals | 7 |
| | 9 |
|
| Allowance for bad debt | 2 |
| | 2 |
|
| Accrued liabilities | 63 |
| | 23 |
|
| Construction contract accounting | — |
| | — |
|
| Other | 4 |
| | 3 |
|
| Total gross deferred tax assets | 532 |
| | 502 |
|
| Valuation allowances | (200 | ) | | (207 | ) |
| Net deferred tax assets | 332 |
| | 295 |
|
| Deferred tax liabilities: | | | |
| Construction contract accounting | (6 | ) | | (1 | ) |
| Intangible amortization | (56 | ) | | (57 | ) |
| Indefinite-lived intangible amortization | (49 | ) | | (41 | ) |
| Fixed asset depreciation | 2 |
| | 1 |
|
| Accrued foreign tax credit carryforwards | (3 | ) | | (2 | ) |
| Total gross deferred tax liabilities | (112 | ) | | (100 | ) |
| Deferred income tax (liabilities) assets, net | $ | 220 |
| | $ | 195 |
|
The valuation allowance for deferred tax assets was $200 million and $207 million at December 31, 2019 and 2018, respectively. The net change in the total valuation allowance was a decrease of $7 million in 2019 and a decrease of $10 million in 2018. Both years saw the benefit of a decrease in our valuation allowance associated with the ability to utilize foreign tax credits partially offset by an increase in the valuation allowance associated with our state net operating losses. The valuation allowance at December 31, 2019 wasaccounts receivable primarily related to foreign tax credit carryforwards and foreign and state net operating loss carryforwards that, in the judgment of management, are not more likely than not to be realized. In assessing the realizability of
deferred tax assets, management considers 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 on the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income and tax-planning strategies in making this assessment.
In the fourth quarter of 2017, we achieved twelve quarters of cumulative U.S. taxable income which is inclusive of income generated in various countries within branches of our U.S. subsidiaries. Income (loss) related to the U.S. branches totaled $90 million, $96 million and $163 million for the fiscal years 2019, 2018, and 2017, respectively, and is included in the foreign component of income in the notes to the financial statements in our Form 10-K. We weighted this positive evidence heavily in our analysis to overcome the previously existing negative evidence of our twelve quarter cumulative loss position.
We concluded that future taxable income and the reversal of deferred tax liabilities, excluding those associated with indefinite-lived intangible assets, were the only sources of taxable income available in determining the amount of valuation allowance to be recorded against our deferred tax assets. The deferred tax liabilities we relied on are projected to reverse in the same jurisdiction and are of the same character as the temporary differences that gave rise to the deferred tax assets. The deferred tax liabilities are projected to reverse in the same periods as the deferred tax assets and are projected to reverse beginning in fiscal year 2020 through fiscal year 2029. We estimated future taxable income by jurisdiction exclusive of reversing temporary differences and carryforwards and applied our foreign tax credit carryforwards based on the sourcing and character of those estimates and considered any limitations.
As a result of these analyses and considerations, we reversed approximately $223 million of our valuation allowance on U.S. deferred tax assets as of December 31, 2017, $152 million of which related to foreign tax credit carryforwards, and $71 million of which related to other net deferred tax assets. We did not release all of the valuation allowance as of December 31, 2017 because certain foreign tax credit carry forwards are projected to expire unused. During the year ended December 31, 2018, we further refined our provisional estimates related to the Deemed Repatriation Transition Tax, as well as the impact of additional guidance related to the Tax Act and our estimates of future taxable income. As a result, we further reduced our valuation allowance for U.S. deferred tax assets by $17 million primarily related to foreign tax credit carryforwards.
Our ability to utilize the unreserved foreign tax credit carryforwards is based on our ability to generate income from foreign sources of at least $824 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 at least $432 million. While our current projections of taxable income exceed these amounts, changes in our forecasted taxable income in the applicable taxing jurisdictions within the carryforward periods could affect the ultimate realization of deferred tax assets and our valuation allowance.
The net deferred tax balance by major jurisdiction after valuation allowance as of December 31, 2019 was as follows:
|
| | | | | | | | | | | |
| Dollars in millions | Net Gross Deferred Asset (Liability) | | Valuation Allowance | | Deferred Asset (Liability), net |
| United States | $ | 370 |
| | $ | (156 | ) | | $ | 214 |
|
| United Kingdom | (6 | ) | | — |
| | (6 | ) |
| Australia | 12 |
| | — |
| | 12 |
|
| Canada | 23 |
| | (22 | ) | | 1 |
|
| Other | 21 |
| | (22 | ) | | (1 | ) |
| Total | $ | 420 |
| | $ | (200 | ) | | $ | 220 |
|
At December 31, 2019, the amount of gross tax attributes available prior to the offset with related uncertain tax positions were as follows:
|
| | | | | |
| | |
| Dollars in millions | December 31, 2019 | | Expiration |
| Foreign tax credit carryforwards | $ | 257 |
| | 2020-2029 |
| Foreign net operating loss carryforwards | $ | 150 |
| | 2020-2039 |
| Foreign net operating loss carryforwards | $ | 34 |
| | Indefinite |
| State net operating loss carryforwards | $ | 1,024 |
| | Various |
As a result of the enactment of the U.S. Tax Act, substantially all of our previously untaxed accumulated and current E&P of certain of our foreign subsidiaries were subject to U.S. tax. Repatriations of these foreign earnings will not be subject to additional U.S. tax but may incur withholding and/or state taxes. Although we have provided for taxes on our previously untaxed accumulated and current E&P of certain of our foreign subsidiaries pursuant to the Tax Act, 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 that may include acquisitions around the world. As of December 31, 2019, the cumulative amount of permanently reinvested foreign earnings is $2.3 billion. With the enactment of the Tax Act, these previously unremitted earnings have now been subject to U.S. tax. However, these undistributed earnings could be subject to additional taxes (withholding and/or state taxes) if remitted, or deemed remitted, as a dividend.
A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows:
|
| | | | | | | | | | | |
| Dollars in millions | 2019 | | 2018 | | 2017 |
| Balance at January 1, | $ | 90 |
| | $ | 184 |
| | $ | 261 |
|
| Increases related to current year tax positions | 2 |
| | 1 |
| | 2 |
|
| Increases related to prior year tax positions | 7 |
| | 18 |
| | 1 |
|
| Decreases related to prior year tax positions | — |
| | (45 | ) | | (1 | ) |
| Settlements | — |
| | (62 | ) | | (80 | ) |
| Lapse of statute of limitations | (1 | ) | | (2 | ) | | (1 | ) |
| Other, primarily due to exchange rate fluctuations affecting non-U.S. tax positions | (1 | ) | | (4 | ) | | 2 |
|
| Balance at December 31, | $ | 97 |
| | $ | 90 |
| | $ | 184 |
|
The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was approximately $83 million as of December 31, 2019. The difference between this amount and the amounts reflected in the tabular reconciliation above relates primarily to deferred income tax benefits on uncertain tax positions. In the next twelve months, it is reasonably possible that our uncertain tax positions could change by approximately $35 million due to settlements with tax authorities and the expirations of statutes of limitations.
We recognize accrued interest and penalties related to uncertain tax positions in income tax expense in our consolidated statements of operations. Our accrual for interest and penalties was $23 million and $19 million as of December 31, 2019 and 2018, respectively. During the years ended December 31, 2019 and 2017, we recognized net interest and penalty charges of $3 million, and $5 million, respectively, while for the year ended December 31, 2018, we recognized a net interest and penalty benefit of $1 million related to uncertain tax positions.
KBR is the parent of a group of domestic companies that are members of a U.S. consolidated federal income tax return. We also file income tax returns in various states and foreign jurisdictions. With few exceptions, we are no longer subject to examination by tax authorities for U.S. federal or state and local income tax for years before 2007.
KBR is subject to a tax sharing agreement primarily covering periods prior to the April 2007 separation from Halliburton. The tax sharing agreement provides, in part, that KBR will be responsible for any audit settlements directly attributable to our business activity for periods prior to our separation from our former parent. As of December 31, 2019 and 2018, we have recorded $5 million in "Other liabilities" on our consolidated balance sheets, respectively, for tax related items under the tax sharing agreement. The balance is not due until receipt by KBR of a future foreign tax credit refund claimreflect claims filed with the IRS.
Note 16. U.S. Government Matters
We provide services to various U.S. governmental agencies, including the U.S. DoD, NASA, and the Department of State. We may have disagreements or experience performance issues on our U.S. government contracts. When performance issues arise under any of these contracts, the U.S. government retains the right to pursue various remedies, including challenges to expenditures, suspension of payments, fines and suspensions or debarment from future business with the U.S. government. The negotiation, administration and settlement of our contracts are subject to audit by the DCAA. The DCAA serves in an advisory role to the DCMA which is responsible for the administration of the majority of our contracts. The scope of these audits include, among other things, the validity of direct and indirect incurred costs, provisional approval of annual billing rates, approval of annual overhead rates, compliance with the FAR and CAS, compliance with certain unique contract clauses and audits of certain aspects of our internal control systems. Based on the information received to date, we do not believe the completed or any ongoing government audits will have a material adverse impact on our results of operations, financial position or cash flows.
Legacy U.S. Government Matters
Between 2002 and 2011, we provided significant support to the U.S. Army and other U.S. government agencies in support of the war in Iraq under the LogCAP III contract. We have been in the process of closing out the LogCAP III contract since 2011, and we expect the contract closeout process to continue for at least another year. As a result of our work under LogCAP III, there are claims and disputes pending between us and the U.S. government which need to be resolved in order to close the contract. The contract closeout process includes resolving objections raised by the U.S. government through a billing dispute process referred to as Form 1s and MFRs. We continue to work with the U.S. government to resolve these issues and are engaged in efforts to reach mutually acceptable resolution of these outstanding matters. However, for certain of these matters, we have filed claims with the ASBCA or the COFC. We also have matters related to ongoing litigation or investigations involvingpayments not yet received for various U.S. government contracts. We anticipate billing additional labor, vendor resolution and litigationcost-reimbursable contracts for which our reimbursable costs as we resolvehave exceeded the open matters inU.S. government's funded values on the future.
Form 1s
Theunderlying task orders or task orders where the U.S. government has issued and has outstanding Form 1s questioning $80 million of billednot authorized us to bill. We believe the remaining disputed costs as of December 31, 2019. They had previously paid us $52 million of the questioned costs related towill be resolved in our services on the LogCAP III contract. The remaining balance of $28 million as of December 31, 2019 is included on our consolidated balance sheets in “Claims and accounts receivable." In addition, we have withheld $26 million from our subcontractorsfavor, at December 31, 2019 related to these questioned costs, which is included in "Other current liabilities" on our consolidated balance sheets.
While we continue to believe that the amounts we have invoicedtime the U.S. government are in compliance with our contract terms and that recovery is probable, we also continue to evaluate our ability to recover these amounts as new information becomes known. As is common in the industry, negotiating and resolving these matters is often an involved and lengthy process, which sometimes necessitates the filing of claims or other legal action as discussed above. Concurrent with our continued negotiations with the U.S. government, we await the rulings on the filed claims. We are unable to predict when the rulings will be issued or when the matters will be settled or resolved with the U.S. government.
As a result of the Form 1s, and claims discussed above as well as open audits, we have accrued a reserve for unallowable costs of $41 million at December 31, 2019 and 2018, and the balances are recorded in "Contract liabilities" and "Other liabilities" in the amounts of $26 million and $15 million, respectively.
Private Security Contractors. Starting in February 2007, we received a series of Form 1srequired to obligate funds from the DCAA informing us of the U.S. government's intent to deny reimbursement to us under the LogCAP III cost reimbursable contract for amounts related to the use of PSCs by KBR and a subcontractor in connection with its work for KBR providing dining facility services in Iraq between 2003 and 2006. The government challenged $57 million in billings of which the government had previously paid and withheld payments from us of $44 million. We had previously recorded the withheld payments in "Claims receivable" on our consolidated balance sheets.
After a series of favorable awards by the ASBCA and subsequent appeals by the U.S. Army, on July 9, 2019 the Court of Appealsappropriations for the Federal Circuit upheld the prior ASBCA decision confirming the entire awardyear in our favor including interest. We recorded additional revenue of $13 million representing the awarded interest not previously recognized on the withheld payments when the cash was received. This matter is now resolved.
Investigations, Qui Tams and Litigation
The following matters relate to ongoing litigation or federal investigations involving U.S. government contracts. Many of these matters involve allegations of violations of the FCA, which prohibits in general terms fraudulent billings to the U.S. government. Suits brought by private individuals are called "qui tams." We believe the costs of litigation and any damages that may be awarded in the FKTC matters described below are billable under the LogCAP III. All costs billed under LogCAP III are subject to audit by the DCAA for reasonableness.
First Kuwaiti Trading Company arbitration. In April 2008, FKTC, one of our LogCAP III subcontractors providing housing containers, filed arbitration with the American Arbitration Association for all its claims under various LogCAP III subcontracts. After complete hearings on all claims, the arbitration panel awarded FKTC $17 million plus interest for claims involving damages on lost or unreturned vehicles. In addition, we determined that we owe FKTC $32 million in connection with other subcontracts provided we are reimbursed for these same costs by the U.S. government. We previously paid FKTC $19 million and the remaining $30 million is recorded in "Other Current Liabilities" on our consolidated balance sheets. As of December 31, 2019, we believe our recorded accruals and the pay-when-paid terms in our contract with FKTC are adequate if we are unable to favorably resolve our claims and disputes against the U.S. government. See "KBR Contract Claim on FKTC containers" below.
Howard qui tam. In March 2011, Geoffrey Howard and Zella Hemphill filed a complaint in the U.S. District Court for the Central District of Illinois alleging that KBR mischarged the government $628 million for unnecessary materials and equipment. In October 2014, the DOJ declined to intervene and the case was partially unsealed. Depositions of DCMA and KBR personnel are expected to occur in early 2020. The court has set a deadline of July 19, 2020 as the cutoff for all fact discovery and depositions. We believe the allegations of fraud by the relators are without merit and, as of December 31, 2019, no amounts have been accrued.
DOJ False Claims Act complaint - Iraq Subcontractor. In January 2014, the DOJ filed a complaint in the U.S. District Court for the Central District of Illinois against KBR and 2 former KBR subcontractors, including FKTC, alleging that 3 former KBR employees were offered and accepted kickbacks from these subcontractors in exchange for favorable treatment in the award and performance of subcontracts to be awarded during the course of KBR's performance of the LogCAP III contract in Iraq. The complaint alleges that as a result of the kickbacks, KBR submitted invoices with inflated or unjustified subcontract prices, resulting in alleged violations of the FCA and the Anti-Kickback Act. The DOJ's investigation dates back to 2004. We self-reported most of the violations and tendered credits to the U.S. government as appropriate. On May 22, 2014, FKTC filed a motion to dismiss, which the U.S. government opposed. Following the submission of our answer in April 2014, the U.S. government was granted a Motion to Strike certain affirmative defenses in March 2015. We do not believe this limits KBR's ability to fully defend all allegations in this matter.
Discovery for this complaint is now complete. The Court has yet to rule on various motions filed in early 2019 that would affect the scope and venue of the case. The court will set hearing and trial dates after addressing the pending motions which we expect will occur in 2020. As of December 31, 2019, we have accrued our best estimate of probable loss related to an unfavorable settlement of this matter in "Other liabilities" on our consolidated balance sheets.
Other matters
KBR Contract Claim on FKTC containers. KBR previously filed a claim before the ASBCA to recover the costs paid to FKTC to settle its requests for equitable adjustment. The DCMA had disallowed the majority of those costs. Those contract claims were stayed in 2013 at the request of the DOJ so that they could pursue the FCA case referenced above. Those claims were reinstated in 2016. We tried our contract appeal in September 2017. In November 2018, we received an unfavorable ruling from the ASBCA disallowing all of our costs paid to FKTC. KBR's motion for reconsideration by a senior panel of judges at the ASBCA was denied. KBR filed its brief on appeal in September 2019. We expect oral arguments will take place in 2020. As of December 31, 2019, we believe our recorded accruals and the pay-when-paid terms in our contract with FKTC are adequate in the event we are unable to favorably resolve our claims and disputes against the government.
Note 17. Other Commitments and Contingencies
Unaoil Investigation.
The DOJ, SEC, and the SFO are conducting investigations of Unaoil, a Monaco based company, in relation to international projects involving several global companies, including KBR, whose interactions with Unaoil are a subject of those investigations. The investigations are focused on compliance with the U.S. FCPA. KBR believes it is cooperating with the DOJ, SEC, and the SFO in their investigations, including through the voluntary submission of information and responding to formal document requests.
Chadian Employee Class Action. In May 2018, former employees of our former Chadian subsidiary, Subsahara Services, Inc. (SSI), filed a class action suit claiming unpaid damages arising from the ESSO Chad Development Project for Exxon Mobil Corporation (Exxon) dating back to the early 2000s. Exxon is also named as a defendant in the case. The SSI employees previously filed two class action cases in or around 2005 and 2006 for alleged unpaid overtime and bonuses. The Chadian Labour Court ruled in favor of the SSI employees for unpaid overtime resulting in a settlement of approximately $25 million which was reimbursed by Exxon under its contract with SSI. The second case for alleged unpaid bonuses was ultimately dismissed by the Supreme Court of Chad.
The current case claims $122 million in unpaid bonuses characterized as damages rather than employee bonuses to avoid the previous Supreme Court dismissal and a 5-year statute of limitations on wage-related claims. SSI’s initial defense was filed and a hearing was held in December 2018. A merits hearing was held in February 2019. In March 2019, the Labour Court issued a decision awarding the plaintiffs approximately $34 million including a $2 million provisional award. SSI and Exxon have appealed the award and requested suspension of the provisional award which was approved on April 2, 2019. Exxon and SSI filed a submission to the Court of Appeal on June 21, 2019. The court has set a hearing for February 28, 2020.
At this time we do not believe a risk of material loss is probable related to this matter, and therefore we have not accrued any loss provisions. SSI is no longer an existing entity in Chad or the United States. Further, we believe any amounts ultimately paid to the former employees related to this adverse ruling would be reimbursable by Exxon based on the applicable contract.
North West Rail Link Project. We participate in an unincorporated joint venture with two partners to provide engineering and design services in relation to the operations, trains and systems of a metro rail project in Sydney, Australia. The project commenced in 2014 and during its execution encountered delays and disputes resulting in claims and breach notices submitted to the joint venture by the client. Since November 2018, the client has submitted multiple claims alleging breach of contract and breach of duty by the joint venture in its execution of the services, claiming losses and damages of up to approximately $300 million Australian dollars. We currently believe the gross of amount of the claims significantly exceeds the client’s entitlement as well as the joint venture’s limits of liability under the contract and that the claims will be covered by project-specific professional indemnity insurance subject to deductibles.
The joint venture and its client are discussing potential resolution of the claims although no specific course of action has been agreed. In August 2019, the client advised that it has filed legal proceedings in the Supreme Court of New South Wales to preserve its position with regards to statute of limitations. The joint venture was served a notice of proceedings in November 2019 and an initial hearing is expected to occur in April 2020. KBR has a 33% participation interest in the joint venture and the partners have joint and several liability with respect to all obligations under the contract. As of December 31, 2019, we have reserved an amount that is immaterial with respect to this matter. However, it is reasonably possible that we may ultimately be required to pay material amounts in excess of reserves. At this time, fact discovery and expert review have not been initiated and the outcome thereof is uncertain such that a more precise estimate cannot be made at this time. Discussions between the joint venture and its client are ongoing.
Environmental
We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. In the U.S, these laws and regulations include, among others: the Comprehensive Environmental Response, Compensation and Liability Act; the Resources Conservation and Recovery Act; the Clean Air Act; the Clean Water Act and the Toxic Substances Control Act. In addition to federal and state laws and regulations, other countries where we do business often have numerous environmental regulatory requirements by which we must abide in the normal course of our operations. These requirements apply to our business segments where we perform construction and industrial maintenance services or operate and maintain facilities.
We continue to monitor conditions at sites owned or previously owned. These locations were primarily utilized for manufacturing or fabrication work and are no longer in operation. The use of these facilities created various environmental issues including deposits of metals, volatile and semi-volatile compounds and hydrocarbons impacting surface and subsurface soils and groundwater. The range of remediation costs could change depending on our ongoing site analysis and the timing and techniques used to implement remediation activities. We do not expect that costs related to environmental matters will have a material adverse effect on our consolidated financial position or results of operations. Based on the information presently available to us the assessment and remediation costs associated with all environmental matters is immaterial and we do not anticipate incurring additional costs.
We had been named as a potentially responsible party in various clean-up actions taken by federal and state agencies in the U.S. All of these matters have been settled or resolved and as of December 31, 2019, we have not been named in any additional matters.
Existing or pending climate change legislation, regulations, international treaties or accords are not expected to have a short-term material direct effect on our business, the markets that we serve or on our results of operations or financial position. However, climate change legislation could have a direct effect on our customers or suppliers, which could impact our business. For example, our commodity-based markets depend on the level of activity of mineral and oil and gas companies and existing or future laws, regulations, treaties or international agreements related to climate change, including incentives to conserve energy or use alternative energy sources, which could impact our business if such laws, regulations, treaties or international agreements reduce the worldwide demand for minerals, oil and natural gas. We continue to monitor developments in this area.
Insurance Programs
Our employee-related health care benefits program is self-funded. Our workers’ compensation, automobile and general liability insurance programs include a deductible applicable to each claim. Claims in excess of our deductible are paid by the insurer. The liabilities are based on claims filed and estimates of claims incurred but not reported. As of December 31, 2019, liabilities for anticipated claim payments and incurred but not reported claims for all insurance programs totaled approximately $42 million, comprised of $14 million included in "Accrued salaries, wages and benefits," $2 million included in "Other current liabilities" and $26 million included in "Other liabilities" all on our consolidated balance sheets. As of December 31, 2018, liabilities for unpaid and incurred but not reported claims for all insurance programs totaled approximately $48 million, comprised of $16 million included in "Accrued salaries, wages and benefits," $3 million included in "Other current liabilities" and $29 million included in "Other liabilities" all on our consolidated balance sheets.
Note 18. Leases
We enter into lease arrangements primarily for real estate, project equipment, transportation and information technology assets in the normal course of our business operations. Real estate leases accounted for approximately 85%91% of our lease obligations at December 31, 2019.2022. An arrangement is determined to be a lease at inception if it conveys the right to control the use of identified property and equipment for a period of time in exchange for consideration. We have elected not to recognize an ROU asset and lease liability for leases with an initial term of 12 months or less. Many of our equipment leases, primarily associated with the performance of projects for U.S. government customers, include one or more renewal option periods, with renewal terms that can extend the lease term in one year increments. The exercise of these lease renewal options is at our sole discretion and is generally dependent on the period of project performance, or extension thereof, determined by our customers. When it is reasonably certain that we will exercise the option, we include the impact of the option in the lease term for purpose of determiningto determine total future lease payments. AsBecause most of our lease agreements do not explicitly state the discount rate, implicit in the lease, we use our incremental borrowing rate on the commencement date to calculate the present value of future lease payments.
Certain leases include payments that are based solely on an index or rate. These variable lease payments are included in the calculation of the ROU asset and lease liability. Other variable lease payments, such as usage-based amounts, are excluded from the ROU asset and lease liability, and are expensed as incurred. In addition to the present value of the future lease payments, the calculation of the ROU asset also includes any deferred rent, lease pre-payments and initial direct costs of obtaining the lease, such as commissions.
In addition to the base rent, real estate leases typically contain provisions for common-area maintenance and other similar services, which are considered non-lease components for accounting purposes. We exclude these non-lease components in calculating the ROU asset and lease liability for real estate leases and expense them as incurred. For all other types of leases, non-lease components are included in calculating our ROU assets and lease liabilities.
The operating ROU asset and current and noncurrent operating lease liabilities are disclosed on our consolidated balance sheets. The finance ROU asset is included in property, plant and equipment and the current and noncurrent finance lease liabilities are included in other current liabilities and other liabilities, respectively, on our consolidated balance sheets.
The components of
our operating lease costs for the
yearyears ended December 31,
20192022, 2021 and 2020 were as follows:
|
| | | |
| | December 31, |
| Dollars in millions | 2019 |
| Operating lease cost | $ | 54 |
|
| Short-term lease cost | 121 |
|
| Total lease cost | $ | 175 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| Dollars in millions | 2022 | | 2021 | | 2020 |
| Operating lease cost | $ | 61 | | | $ | 51 | | | $ | 50 | |
| Short-term lease cost | 369 | | | 528 | | | 112 | |
| | | | | |
| | | | | |
| Total lease cost | $ | 430 | | | $ | 579 | | | $ | 162 | |
Operating lease cost for the year ended ended December 31, 2019 includes operating lease ROU asset amortization of $47 million, $38 million and $37 million for the years ended December 31, 2022, 2021 and 2020, respectively, and other noncash operating lease costs of $16 million related to the accretion of operating lease liabilities and straight-line lease accounting.
Total rent expense on our operating leases under the previous lease standard were $144 million and $139accounting of $14 million for the year ended December 31, 2022 and $13 million for the year ended years ended December 31, 20182021 and 2017, respectively.2020.
Total short-term lease commitments as of December 31, 2019 was2022 were approximately $77$100 million. Additional information related to leases was as follows:
| | | | December 31, | | December 31, | | December 31, | | December 31, |
| Dollars in millions | 2019 | Dollars in millions | 2022 | | 2021 | | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities | | Cash paid for amounts included in the measurement of lease liabilities | | | | | |
| Operating cash flows from operating leases | $ | 56 |
| Operating cash flows from operating leases | $ | 63 | | | $ | 59 | | | $ | 61 | |
| Financing cash flows from finance leases | | Financing cash flows from finance leases | $ | 11 | | | $ | 13 | | | $ | 11 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 20 |
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 61 | | | $ | 33 | | | $ | 62 | |
| Right-of-use assets obtained in exchange for new finance lease liabilities | | Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 13 | | | $ | 11 | | | $ | 34 | |
| Weighted-average remaining lease term-operating (in years) | 8.0 |
| Weighted-average remaining lease term-operating (in years) | 7 years | | 6 years | | 6 years |
| Weighted-average remaining lease term-finance (in years) | | Weighted-average remaining lease term-finance (in years) | 2 years | | 3 years | | 3 years |
| Weighted-average discount rate-operating leases | 7.6 | % | Weighted-average discount rate-operating leases | 6.0 | % | | 6.3 | % | | 6.8 | % |
| Weighted-average discount rate-finance leases | | Weighted-average discount rate-finance leases | 3.1 | % | | 4.0 | % | | 4.7 | % |
The following is a maturity analysis of the future undiscounted cash flows associated with our operating lease liabilities as of December 31, 2019:2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year |
| Dollars in millions | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
| Future payments - operating leases | $ | 44 | | | $ | 51 | | | $ | 43 | | | $ | 32 | | | $ | 29 | | | $ | 102 | | | $ | 301 | |
| Future payments - finance leases | 9 | | | 8 | | | 3 | | | — | | | — | | | — | | | 20 | |
| Total future payments - all leases | $ | 53 | | | $ | 59 | | | $ | 46 | | | $ | 32 | | | $ | 29 | | | $ | 102 | | | $ | 321 | |
| | | | Year | |
| Dollars in millions | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Total | Dollars in millions | Operating Leases | | Finance Leases | | Total |
| Future payments - operating leases | $ | 54 |
| | $ | 44 |
| | $ | 37 |
| | $ | 33 |
| | $ | 25 |
| | $ | 119 |
| | $ | 312 |
| |
| Total future payments | | Total future payments | $ | 301 | | | $ | 20 | | | $ | 321 | |
| Less imputed interest | | Less imputed interest | (60) | | | (1) | | | (61) | |
| Present value of future lease payments | | Present value of future lease payments | $ | 241 | | | $ | 19 | | | $ | 260 | |
| Less current portion of lease obligations | | Less current portion of lease obligations | (48) | | | (9) | | | (57) | |
| Noncurrent portion of lease obligations | | Noncurrent portion of lease obligations | $ | 193 | | | $ | 10 | | | $ | 203 | |
|
|
| | | |
| Dollars in millions | Operating Leases |
| Total future payments | $ | 312 |
|
| Less imputed interest | (81 | ) |
| Present value of future lease payments | $ | 231 |
|
| Less current portion of lease obligations | (39 | ) |
| Noncurrent portion of lease obligations | $ | 192 |
|
As of December 31, 2018, future total rent payments on noncancellable operating leases under the previous lease standard were $367 million in the aggregate, which consisted of the following: $76 million in 2019; $48 million in 2020; $39 million in 2021; $32 million in 2022; $29 million in 2023; and $143 million thereafter.
Note 19. Shareholders’ Equity18. Accumulated Other Comprehensive Loss
The following tables summarize our activity in shareholders’ equity:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Dollars in millions | Total | | PIC | | Retained Earnings | | Treasury Stock | | AOCL | | NCI |
| Balance at December 31, 2016 | $ | 725 |
| | $ | 2,088 |
| | $ | 467 |
| | $ | (769 | ) | | $ | (1,049 | ) | | $ | (12 | ) |
| Acquisition of noncontrolling interest | (8 | ) | | (8 | ) | | — |
| | — |
| | — |
| | — |
|
| Share-based compensation | 12 |
| | 12 |
| | — |
| | — |
| | — |
| | — |
|
| Dividends declared to shareholders ($0.32/share) | (45 | ) | | — |
| | (45 | ) | | — |
| | — |
| | — |
|
| Repurchases of common stock | (53 | ) | | — |
| | — |
| | (53 | ) | | — |
| | — |
|
| Issuance of ESPP shares | 3 |
| | (1 | ) | | — |
| | 4 |
| | — |
| | — |
|
| Investments by noncontrolling interests | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Distributions to noncontrolling interests | (4 | ) | | — |
| | — |
| | — |
| | — |
| | (4 | ) |
| Other noncontrolling interests activity | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) |
| Net income | 440 |
| | — |
| | 432 |
| | — |
| | — |
| | 8 |
|
| Other comprehensive income, net of tax | 127 |
| | — |
| | — |
| | — |
| | 127 |
| | — |
|
| Balance at December 31, 2017 | $ | 1,197 |
| | $ | 2,091 |
| | $ | 854 |
| | $ | (818 | ) | | $ | (922 | ) | | $ | (8 | ) |
| Cumulative effect of change in accounting policy, net of tax (Note 1) | 144 |
| | — |
| | 144 |
| | — |
| | — |
| | — |
|
| Adjusted balance at January 1, 2018 | 1,341 |
| | 2,091 |
| | 998 |
| | (818 | ) | | (922 | ) | | (8 | ) |
| Acquisition of noncontrolling interest | 69 |
| | 69 |
| | — |
| | — |
| | — |
| | — |
|
| Share-based compensation | 10 |
| | 10 |
| | — |
| | — |
| | — |
| | — |
|
| Tax benefit decrease related to share-based plans | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
| Common stock issued upon exercise of stock options | 2 |
| | 2 |
| | — |
| | — |
| | — |
| | — |
|
| Dividends declared to shareholders ($0.32/share) | (44 | ) | | — |
| | (44 | ) | | — |
| | — |
| | — |
|
| Repurchases of common stock | (3 | ) | | — |
| | — |
| | (3 | ) | | — |
| | — |
|
| Issuance of ESPP shares | 3 |
| | (1 | ) | | — |
| | 4 |
| | — |
| | — |
|
| Issuance of convertible debt and call spread overlay | 18 |
| | 18 |
| | — |
| | — |
| | — |
| | — |
|
| Distributions to noncontrolling interests | (3 | ) | | — |
| | — |
| | — |
| | — |
| | (3 | ) |
| Other noncontrolling interests activity | 2 |
| | — |
| | — |
| | — |
| | — |
| | 2 |
|
| Net income | 310 |
| | — |
| | 281 |
| | — |
| | — |
| | 29 |
|
| Other comprehensive income, net of tax | 12 |
| | — |
| | — |
| | — |
| | 12 |
| | — |
|
| 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 (Note 1) | 21 |
| | — |
| | 21 |
| | — |
| | — |
| | — |
|
| Cumulative adjustment for the adoption of ASC 606 for our unconsolidated affiliates, net of tax (Note 1) | 29 |
| | — |
| | 29 |
| | — |
| | — |
| | — |
|
| Adjusted balance at January 1, 2019 | 1,768 |
| | 2,190 |
| | 1,285 |
| | (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 (loss), net of tax | (77 | ) | | — |
| | — |
| | — |
| | (77 | ) | | — |
|
| Balance at December 31, 2019 | $ | 1,857 |
| | $ | 2,206 |
| | $ | 1,441 |
| | $ | (817 | ) | | $ | (987 | ) | | $ | 14 |
|
AOCL, net of tax
|
| | | | | | | | | | | |
| | December 31, |
| Dollars in millions | 2019 | | 2018 | | 2017 |
| Accumulated foreign currency translation adjustments, net of tax of $3, $2 and $4 | $ | (315 | ) | | $ | (304 | ) | | $ | (259 | ) |
| Pension and post-retirement benefits, net of tax of $224, $213 and $227 | (654 | ) | | (592 | ) | | (660 | ) |
| Fair value of derivatives, net of tax of $5, $3 and $0 | (18 | ) | | (14 | ) | | (3 | ) |
| Total accumulated other comprehensive loss | $ | (987 | ) | | $ | (910 | ) | | $ | (922 | ) |
Changes in AOCL, net of tax, by component
| | | | | | | | | | | | | | | | | | | | | | | |
| Dollars in millions | Accumulated foreign currency translation adjustments | | Accumulated pension liability adjustments | | Changes in fair value of derivatives | | Total |
| Balance at December 31, 2020 | $ | (291) | | | $ | (764) | | | $ | (28) | | | $ | (1,083) | |
| Other comprehensive income (loss) adjustments before reclassifications | (11) | | | 168 | | | 12 | | | 169 | |
| Amounts reclassified from AOCL | 6 | | | 15 | | | 12 | | | 33 | |
| Net other comprehensive income (loss) | (5) | | | 183 | | | 24 | | | 202 | |
| Balance at December 31, 2021 | $ | (296) | | | $ | (581) | | | $ | (4) | | | $ | (881) | |
| Other comprehensive income (loss) adjustments before reclassifications | (69) | | | (6) | | | 39 | | | (36) | |
| Amounts reclassified from AOCL | 13 | | | 19 | | | 3 | | | 35 | |
| Net other comprehensive income (loss) | (56) | | | 13 | | | 42 | | | (1) | |
| Balance at December 31, 2022 | $ | (352) | | | $ | (568) | | | $ | 38 | | | $ | (882) | |
|
| | | | | | | | | | | | | | | |
| Dollars in millions | Accumulated foreign currency translation adjustments | | Accumulated pension liability adjustments | | Changes in fair value of derivatives | | Total |
| Balance at December 31, 2017 | $ | (259 | ) | | $ | (660 | ) | | $ | (3 | ) | | $ | (922 | ) |
| Other comprehensive income adjustments before reclassifications | (51 | ) | | 44 |
| | (20 | ) | | (27 | ) |
| Amounts reclassified from AOCL | 6 |
| | 24 |
| | 9 |
| | 39 |
|
| Net other comprehensive income (loss) | (45 | ) | | 68 |
| | (11 | ) | | 12 |
|
| Balance at December 31, 2018 | $ | (304 | ) | | $ | (592 | ) | | $ | (14 | ) | | $ | (910 | ) |
| Other comprehensive income adjustments before reclassifications | (3 | ) | | (76 | ) | | (14 | ) | | (93 | ) |
| Amounts reclassified from AOCL | (8 | ) | | 14 |
| | 10 |
| | 16 |
|
| Net other comprehensive income (loss) | (11 | ) | | (62 | ) | | (4 | ) | | (77 | ) |
| Balance at December 31, 2019 | $ | (315 | ) | | $ | (654 | ) | | $ | (18 | ) | | $ | (987 | ) |
Reclassifications out of AOCL, net of tax, by component
|
| | | | | | | | | |
| Dollars in millions | December 31, 2019 | | December 31, 2018 | | Affected line item on the Consolidated Statements of Operations |
| Accumulated foreign currency adjustments | | | | | |
| Reclassification of foreign currency adjustments | 8 |
| | $ | (6 | ) | | Gain (loss) on disposition of assets and Gain on consolidation of Aspire entities, respectively |
| Tax benefit | — |
| | — |
| | Provision for income taxes |
| Net accumulated foreign currency | $ | 8 |
| | $ | (6 | ) | | |
| | | | | | |
| Accumulated pension liability adjustments | | | | | |
| Amortization of actuarial loss (a) | $ | (17 | ) | | $ | (28 | ) | | See (a) below |
| Tax benefit | 3 |
| | 4 |
| | Provision for income taxes |
| Net pension and post-retirement benefits | $ | (14 | ) | | $ | (24 | ) | | Net of tax |
| | | | | | |
| Changes in fair value for derivatives | | | | | |
| Foreign currency hedge and interest rate swap settlements | $ | (10 | ) | | $ | (9 | ) | | Other non-operating income (loss) |
| Tax benefit | — |
| | — |
| | Provision for income taxes |
| Net changes in fair value of derivatives | $ | (10 | ) | | $ | (9 | ) | | Net of tax |
| | | | | | | | | | | | | | | | | |
| Dollars in millions | December 31, 2022 | | December 31, 2021 | | Affected line item on the Consolidated Statements of Operations |
| Accumulated foreign currency adjustments | | | | | |
| Reclassification of foreign currency adjustments | $ | (13) | | | $ | (6) | | | Net income attributable to noncontrolling interests and Gain on disposition of assets and investments |
| Tax benefit | — | | | — | | | Provision for income taxes |
| Net accumulated foreign currency | $ | (13) | | | $ | (6) | | | |
| | | | | |
| Accumulated pension liability adjustments | | | | | |
| Amortization of actuarial loss (a) | $ | (24) | | | $ | (32) | | | See (a) below |
| Tax benefit | 5 | | | 17 | | | Provision for income taxes |
| Net pension and post-retirement benefits | $ | (19) | | | $ | (15) | | | Net of tax |
| | | | | |
| Changes in fair value for derivatives | | | | | |
| Foreign currency hedge and interest rate swap settlements | $ | (4) | | | $ | (16) | | | Other non-operating income (expense) |
| Tax benefit | 1 | | | 4 | | | Provision for income taxes |
| Net changes in fair value of derivatives | $ | (3) | | | $ | (12) | | | Net of tax |
| |
(a) | This item is included in the computation of net periodic pension cost. See Note 13 to our consolidated financial statements for further discussion. |
As a result of the Tax Cuts and Jobs Act of 2017, certain income tax effects related to items in AOCL have been stranded in AOCL, and we did not elect to reclassify these stranded tax effects to retained earnings. The tax effects remaining in AOCL are released only when all related units of account are liquidated, sold or extinguished.
Shares of common stock
|
| | |
Shares in millions | Shares |
Balance at December 31, 2017 | 176.6 |
|
Common stock issued | 0.8 |
|
Balance at December 31, 2018 | 177.4 |
|
Common stock issued | 0.9 |
|
Balance at December 31, 2019 | 178.3 |
|
(a)This item is included in the computation of net periodic pension cost. See Note 11 to our consolidated financial statements for further discussion.
Shares of treasury stock
|
| | | | | | |
| Shares and dollars in millions | Shares | | Amount |
| Balance at December 31, 2017 | 36.5 |
| | $ | 818 |
|
| Treasury stock acquired, net of ESPP shares issued | — |
| | (1 | ) |
| Balance at December 31, 2018 | 36.5 |
| | 817 |
|
| Treasury stock acquired, net of ESPP shares issued | — |
| | — |
|
| Balance at December 31, 2019 | 36.5 |
| | $ | 817 |
|
Dividends
We declared dividends totaling $46 million and $44 million in 2019 and 2018, respectively.
Note 20.19. Share Repurchases
Authorized Share Repurchase Program
On February 25, 2014, ourthe Board of Directors authorized a plan to repurchase up to $350 million of our outstanding shares of common stock, which replaced and terminated the August 26, 2011 share repurchase program. As of December 31, 2019, $160 million remainremained 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 remained available for repurchase under this authorization.
On October 18, 2022, the Board of Directors authorized an increase of approximately $420 million to our share repurchase program, increasing the authorization level to $500 million. As of December 31, 2022, $451 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.
Share Maintenance Programs
Stock options and restricted stock awards granted under the KBR, Inc. 2006 Stock and Incentive Plan ("KBR Stock Plan") may be satisfied using shares of our authorized but unissued common stock or our treasury share account.
The ESPP allows eligible employees to withhold up to 10% of their earnings, subject to some limitations, to purchase shares of KBR common stock. These shares are issued from our treasury share account.
Withheld to Cover Program
In addition to the plans above, we alsoWe have in place a "withheld to cover" program, which allows us to withhold common shares from employees in connection with the settlement of income tax and related benefit withholding obligations arising from the issuance of share basedshare-based equity awards under the KBR Stock Plan.
The table below presents information on our annual share repurchases activity under these programs:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| Number of Shares | | Average Price per Share | | Dollars in Millions |
| Repurchases under the $500 million authorized share repurchase program | 4,029,686 | | | $ | 47.94 | | | $ | 193 | |
| | | | | |
| Withheld to cover shares | 199,642 | | | 48.64 | | | 10 | |
| Total | 4,229,328 | | | $ | 47.97 | | | $ | 203 | |
| | | | | |
| Year ending December 31, 2021 |
| Number of Shares | | Average Price per Share | | Dollars in Millions |
| Repurchases under the $350 million authorized share repurchase program | 1,874,343 | | | $ | 41.52 | | | $ | 78 | |
| | | | | |
| Withheld to cover shares | 148,535 | | | 32.39 | | | 4 | |
| Total | 2,022,878 | | | $ | 40.85 | | | $ | 82 | |
|
| | | | | | | | | | |
| | Year ending December 31, 2019 |
| | Number of Shares | | Average Price per Share | | Dollars in Millions |
| Repurchases under the $350 million authorized share repurchase program | — |
| | $ | — |
| | $ | — |
|
| Repurchases under the existing share maintenance program | — |
| | — |
| | — |
|
| Withheld to cover shares | 194,124 |
| | 20.59 |
| | 4 |
|
| Total | 194,124 |
| | $ | 20.59 |
| | $ | 4 |
|
| | | | | | |
| | Year ending December 31, 2018 |
| | Number of Shares | | Average Price per Share | | Dollars in Millions |
| Repurchases under the $350 million authorized share repurchase program | — |
| | $ | — |
| | $ | — |
|
| Repurchases under the existing share maintenance program | — |
| | — |
| | — |
|
| Withheld to cover shares | 175,469 |
| | 15.81 |
| | 3 |
|
| Total | 175,469 |
| | $ | 15.81 |
| | $ | 3 |
|
Note 21.20. Share-based Compensation and Incentive Plans
KBR Stock Plan
In November 2006, KBR established the KBR Stock Plan, which provides for the grant of any or all of the following types of share-based compensation listed below:
•stock options, including incentive stock options and nonqualified stock options;
•stock appreciation rights, in tandem with stock options or freestanding;
•restricted stock;
•restricted stock units;
•cash performance awards; and
•stock value equivalent awards.
In May 2012, the KBR Stock Plan was amended to add 2 million shares of our common stock available for issuance under the KBR Stock Plan and increase certain sublimits.
In May 2016, the KBR Stock Plan was further amended to add 4.4 million shares of our common stock available for issuance under the KBR Stock Plan. Additionally, this amendment increased the sublimit under the Stock Plan in the form of restricted stock awards, restricted stock unit awards, stock value equivalent awards or pursuant to performance awards denominated in common stock by 4.4 million. Under the terms of the KBR Stock Plan, 16.4 million shares of common stock have been reserved for issuance to employees and non-employee directors. The plan specifies that no more than 9.9 million shares can be awarded as restricted stock, restricted stock units, stock value equivalents or pursuant to performance awards denominated in common stock.
At December 31, 2019,2022, approximately 5.54.2 million shares were available for future grants under the KBR Stock Plan, of which approximately 2.60.9 million shares remained available for restricted stock awards or restricted stock unit awards.
KBR Stock Options
Under the KBR Stock Plan, stock options are granted with an exercise price not less than the fair market value of the common stock on the date of the grant and a term no greater than 10 years. The term and vesting periods are established at the discretion of the Compensation Committee at the time of each grant. The fair value of options at the date of grant arewere estimated using the Black-Scholes-Merton option pricing model. The expected volatility of KBR options granted in each year is based upon a blended rate that uses the historical and implied volatility of common stock for KBR. The expected term of KBR options granted was based on KBR's historical experience. The estimated dividend yield iswas based upon KBR’s annualized dividend rate divided by the market price of KBR’s stock on the option grant date. The risk-free interest rate iswas based upon the yield of U.S. government issued treasury bills or notes on the option grant date. We amortize the fair value of the stock options over the vesting period on a straight-line basis. Options are granted from shares authorized by our Board of Directors. There were 0no stock options granted in 2019, 20182022, 2021 or 2017.2020.
The following table presents stock options granted, exercised, forfeited and expired under KBR share-based compensation plans for the year ended December 31, 2019.2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| KBR stock options activity summary | Number
of Shares | | Weighted
Average
Exercise Price
per Share | | Weighted
Average
Remaining
Contractual
Term (years) | | Aggregate
Intrinsic Value
(in millions) |
| Outstanding at December 31, 2021 | 617,347 | | | $ | 24.27 | | | 2.18 | | $ | 1.45 | |
| Granted | — | | | — | | | | | |
| Exercised | (183,226) | | | 29.27 | | | | | |
| Forfeited | — | | | — | | | | | |
| Expired | (18,798) | | | 34.58 | | | | | |
| Outstanding at December 31, 2022 | 415,323 | | | $ | 21.60 | | | 1.67 | | $ | 1.30 | |
| Exercisable at December 31, 2022 | 415,323 | | | $ | 21.48 | | | 1.67 | | $ | 1.30 | |
|
| | | | | | | | | | | | |
| KBR stock options activity summary | Number of Shares | | Weighted Average Exercise Price per Share | | Weighted Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value (in millions) |
| Outstanding at December 31, 2018 | 2,090,519 |
| | $ | 24.34 |
| | 3.88 | | $ | 0.83 |
|
| Granted | — |
| | — |
| |
| | |
| Exercised | (289,942 | ) | | 16.26 |
| |
| | |
| Forfeited | — |
| | — |
| |
| | |
| Expired | (197,990 | ) | | 16.68 |
| |
| | |
| Outstanding at December 31, 2019 | 1,602,587 |
| | $ | 26.74 |
| | 3.33 | | $ | 0.87 |
|
| Exercisable at December 31, 2019 | 1,601,297 |
| | $ | 26.73 |
| | 3.33 | | $ | 0.87 |
|
The total intrinsic values of options exercised for the years ended December 31, 2019, 20182022, 2021 and 20172020 were $0.3$0.2 million, $0.1$0.6 million and $0.4$0.1 million, respectively. As of December 31, 2019,2022, there was 0no unrecognized compensation cost, net of estimated forfeitures, related to non-vested KBR stock options. StockThere was no stock option compensation expense was $0 million in 2019, $0 million in 20182022, 2021 and $1 million in 2017. Total income tax benefit recognized in net income for share-based compensation arrangements was $0 million in 2019, $0 million in 2018 and $0 million in 2017.2020.
Restricted shares issued under the KBR Stock Plan are restricted as to sale or disposition. These restrictions lapse periodically over a period of time not exceeding 10 years. Restrictions may also lapse for early retirement and other conditions in accordance with our established policies. Upon termination of employment, shares on which restrictions have not lapsed must be returned to us, resulting in restricted stock forfeitures. The fair market value of the stock on the date of grant is amortized and ratably charged to income over the period during which the restrictions lapse on a straight-line basis. For awards with performance conditions, an evaluation is made each quarter as to the likelihood of meeting the performance criteria. Share-based compensation is then adjusted to reflect the number of shares expected to vest and the cumulative vesting period met to date.
