KBR, INC. - Quarter Report: 2019 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2019
OR
☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to |
Commission File Number: 1-33146
![kbrlogofinal2019.jpg](https://www.sec.gov/Archives/edgar/data/0001357615/000135761519000134/kbrlogofinal2019.jpg)
KBR, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 20-4536774 | |||
(State of incorporation) | (I.R.S. Employer Identification No.) | |||
601 Jefferson Street, Suite 3400 | Houston | Texas | 77002 | |
(Address of principal executive offices) | (Zip Code) |
(713) 753-3011
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which listed |
Common Stock, $0.001 par value | KBR | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ☒ | Accelerated filer | ☐ | ||
Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ☐ | ||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 23, 2019, there were 141,554,749 shares of KBR, Inc. Common Stock, par value $0.001 per share, outstanding.
TABLE OF CONTENTS
Page | |
Condensed Consolidated Balance Sheets | |
3
Forward-Looking and Cautionary Statements
This Quarterly Report on Form 10-Q contains certain statements that are, or may be deemed to be, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, as amended. The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Some of the statements contained in this Quarterly Report on Form 10-Q are forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. The words "believe," "may," "estimate," "continue," "anticipate," "intend," "plan," "expect" and similar expressions are intended to identify forward-looking statements. Forward-looking statements include information concerning our possible or assumed future financial performance and results of operations.
We have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. While it is not possible to identify all factors, factors that could cause actual future results to differ materially include the risks and uncertainties disclosed in our 2018 Annual Report on Form 10-K contained in Part I under "Risk Factors" and the risk factors and other cautionary statements contained in our other filings with the SEC.
Many of these factors are beyond our ability to control or predict. Any of these factors, or a combination of these factors, could materially and adversely affect our future financial condition or results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially and adversely from those projected in the forward-looking statements. We caution against putting undue reliance on forward-looking statements or projecting any future results based on such statements or on present or prior earnings levels. In addition, each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statement.
4
Glossary of Terms
The following frequently used terms, abbreviations or acronyms are used in this Quarterly Report on Form 10-Q as defined below:
Acronym | Definition | |
AFCAP | Air Force Contract Augmentation Program | |
Affinity | Affinity Flying Training Services Ltd. | |
AOCL | Accumulated other comprehensive loss | |
ASBCA | Armed Services Board of Contract Appeals | |
ASC | Accounting Standards Codification | |
ASU | Accounting Standards Update | |
Carillion | Carillion plc | |
CAS | Cost Accounting Standards for U.S. government contracts | |
COFC | U.S. Court of Federal Claims | |
DCAA | Defense Contract Audit Agency | |
DCMA | Defense Contract Management Agency | |
DoD | Department of Defense | |
DOJ | U.S. Department of Justice | |
EBIC | Egypt Basic Industries Corporation | |
EPC | Engineering, procurement and construction | |
ES | Energy Solutions | |
ESPP | Employee Stock Purchase Plan | |
Exchange Act | Securities Exchange Act of 1934, as amended | |
FAR | Federal Acquisition Regulation | |
FASB | Financial Accounting Standards Board | |
FCA | False Claims Act | |
FKTC | First Kuwaiti Trading Company | |
FLNG | Floating liquefied natural gas | |
FPSO | Floating production, storage and offshore | |
FPUs | Floating production units | |
FSRU | Floating storage and regasification unit | |
GS | Government Solutions | |
GTL | Gas to liquids | |
HETs | Heavy equipment transporters | |
JKC | JKC Australia LNG, an Australian joint venture executing the Ichthys LNG Project | |
LIBOR | London interbank offered rate | |
LNG | Liquefied natural gas | |
MD&A | Management's Discussion and Analysis of Financial Condition and Results of Operations (Part I, Item 2 of this Quarterly Report on Form 10-Q) | |
MFRs | Memorandums for Record | |
MoD | Ministry of Defence | |
NCI | Noncontrolling interests | |
PFIs | Private financed initiatives and projects | |
PIC | Paid-in capital in excess of par | |
PLOC | Performance Letter of Credit facility | |
PSC | Private Security Contractor | |
SEC | U.S. Securities and Exchange Commission |
5
Acronym | Definition | |
SFO | U.K. Serious Fraud Office | |
SGT | Stinger Ghaffarian Technologies | |
SMS | Space and Mission Solutions | |
TS | Technology Solutions | |
U.K. | United Kingdom | |
U.S. | United States | |
U.S. GAAP | Accounting principles generally accepted in the United States | |
VIEs | Variable interest entities |
6
PART I. FINANCIAL INFORMATION
Item 1. Financial Information
KBR, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income
(In millions, except for per share data)
(Unaudited)
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenues | $ | 1,422 | $ | 1,267 | $ | 2,762 | $ | 2,305 | |||||||
Cost of revenues | (1,262 | ) | (1,106 | ) | (2,449 | ) | (2,027 | ) | |||||||
Gross profit | 160 | 161 | 313 | 278 | |||||||||||
Equity in earnings of unconsolidated affiliates | 15 | 12 | 15 | 33 | |||||||||||
Selling, general and administrative expenses | (88 | ) | (72 | ) | (166 | ) | (143 | ) | |||||||
Acquisition and integration related costs | (1 | ) | (1 | ) | (2 | ) | (4 | ) | |||||||
Gain on disposition of assets and investments | 6 | — | 10 | — | |||||||||||
Gain on consolidation of Aspire subcontracting entities | — | — | — | 115 | |||||||||||
Operating income | 92 | 100 | 170 | 279 | |||||||||||
Interest expense | (26 | ) | (17 | ) | (51 | ) | (23 | ) | |||||||
Other non-operating income (loss) | 2 | (1 | ) | 7 | (3 | ) | |||||||||
Income before income taxes and noncontrolling interests | 68 | 82 | 126 | 253 | |||||||||||
Provision for income taxes | (18 | ) | (18 | ) | (34 | ) | (52 | ) | |||||||
Net income | 50 | 64 | 92 | 201 | |||||||||||
Net income attributable to noncontrolling interests | (2 | ) | (20 | ) | (4 | ) | (21 | ) | |||||||
Net income attributable to KBR | $ | 48 | $ | 44 | $ | 88 | $ | 180 | |||||||
Net income attributable to KBR per share: | |||||||||||||||
Basic | $ | 0.34 | $ | 0.31 | $ | 0.62 | $ | 1.27 | |||||||
Diluted | $ | 0.34 | $ | 0.31 | $ | 0.62 | $ | 1.27 | |||||||
Basic weighted average common shares outstanding | 141 | 140 | 141 | 140 | |||||||||||
Diluted weighted average common shares outstanding | 141 | 141 | 141 | 141 | |||||||||||
Cash dividends declared per share | $ | 0.08 | $ | 0.08 | $ | 0.16 | $ | 0.16 | |||||||
Net income | $ | 50 | $ | 64 | $ | 92 | $ | 201 | |||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Foreign currency translation adjustments, net of taxes of $0, $(2), $0 and $(3) | (13 | ) | (26 | ) | (14 | ) | (20 | ) | |||||||
Pension and post-retirement benefits, net of taxes of $(1), $(1), $(2) and $(2) | 4 | 7 | 7 | 13 | |||||||||||
Changes in fair value of derivatives, net of taxes of $0, $0, $0 and $0 | (7 | ) | (5 | ) | (9 | ) | (5 | ) | |||||||
Total other comprehensive loss | (16 | ) | (24 | ) | (16 | ) | (12 | ) | |||||||
Comprehensive income | 34 | 40 | 76 | 189 | |||||||||||
Less: Comprehensive income attributable to noncontrolling interests | (2 | ) | (20 | ) | (4 | ) | (21 | ) | |||||||
Comprehensive income attributable to KBR | $ | 32 | $ | 20 | $ | 72 | $ | 168 |
See accompanying notes to condensed consolidated financial statements.
7
KBR, Inc.
Condensed Consolidated Balance Sheets
(In millions, except share data)
June 30, | December 31, | ||||||
2019 | 2018 | ||||||
(Unaudited) | |||||||
Assets | |||||||
Current assets: | |||||||
Cash and equivalents | $ | 611 | $ | 739 | |||
Accounts receivable, net of allowance for doubtful accounts of $7 and $9 | 1,035 | 927 | |||||
Contract assets | 202 | 185 | |||||
Other current assets | 132 | 108 | |||||
Total current assets | 1,980 | 1,959 | |||||
Claims and accounts receivable | 100 | 98 | |||||
Property, plant, and equipment, net of accumulated depreciation of $371 and $355 (including net PPE of $32 and $35 owned by a variable interest entity) | 116 | 121 | |||||
Operating lease right-of-use assets | 181 | — | |||||
Goodwill | 1,264 | 1,265 | |||||
Intangible assets, net of accumulated amortization of $168 and $151 | 505 | 516 | |||||
Equity in and advances to unconsolidated affiliates | 813 | 724 | |||||
Deferred income taxes | 218 | 222 | |||||
Other assets | 141 | 147 | |||||
Total assets | $ | 5,318 | $ | 5,052 | |||
Liabilities and Shareholders’ Equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 611 | $ | 546 | |||
Contract liabilities | 487 | 463 | |||||
Accrued salaries, wages and benefits | 239 | 221 | |||||
Nonrecourse project debt | 11 | 10 | |||||
Operating lease liabilities | 40 | — | |||||
Other current liabilities | 175 | 179 | |||||
Total current liabilities | 1,563 | 1,419 | |||||
Pension obligations | 219 | 250 | |||||
Employee compensation and benefits | 103 | 109 | |||||
Income tax payable | 86 | 84 | |||||
Deferred income taxes | 29 | 27 | |||||
Nonrecourse project debt | 11 | 17 | |||||
Long-term debt | 1,188 | 1,226 | |||||
Operating lease liabilities | 203 | — | |||||
Other liabilities | 122 | 202 | |||||
Total liabilities | 3,524 | 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, 178,104,247 and 177,383,302 shares issued, and 141,545,772 and 140,900,032 shares outstanding, respectively | — | — | |||||
PIC | 2,197 | 2,190 | |||||
Retained earnings | 1,321 | 1,235 | |||||
Treasury stock, 36,558,475 shares and 36,483,270 shares, at cost, respectively | (818 | ) | (817 | ) | |||
AOCL | (926 | ) | (910 | ) | |||
Total KBR shareholders’ equity | 1,774 | 1,698 | |||||
Noncontrolling interests | 20 | 20 | |||||
Total shareholders’ equity | 1,794 | 1,718 | |||||
Total liabilities and shareholders’ equity | $ | 5,318 | $ | 5,052 |
See accompanying notes to condensed consolidated financial statements.
8
KBR, Inc. Condensed Consolidated Statements of Cash Flows (In millions) (Unaudited) | |||||||
Six Months Ended June 30, | |||||||
2019 | 2018 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 92 | $ | 201 | |||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||
Depreciation and amortization | 48 | 30 | |||||
Equity in earnings of unconsolidated affiliates | (15 | ) | (33 | ) | |||
Deferred income tax expense | — | 34 | |||||
Gain on disposition of assets and investments | (10 | ) | — | ||||
Gain on consolidation of Aspire entities | — | (115 | ) | ||||
Other | 12 | 6 | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable, net of allowance for doubtful accounts | (118 | ) | (70 | ) | |||
Contract assets | (17 | ) | (38 | ) | |||
Accounts payable | 67 | 36 | |||||
Contract liabilities | 26 | (58 | ) | ||||
Accrued salaries, wages and benefits | 19 | 4 | |||||
Payments from unconsolidated affiliates, net | 5 | 6 | |||||
Distributions of earnings from unconsolidated affiliates | 45 | 9 | |||||
Pension funding | (19 | ) | (19 | ) | |||
Other assets and liabilities | (54 | ) | (29 | ) | |||
Total cash flows provided by (used in) operating activities | $ | 81 | $ | (36 | ) | ||
Cash flows from investing activities: | |||||||
Purchases of property, plant and equipment | $ | (6 | ) | $ | (11 | ) | |
Proceeds from disposition of assets and investments | 6 | 1 | |||||
Investments in equity method joint ventures | (131 | ) | (162 | ) | |||
Acquisition of businesses, net of cash acquired | — | (357 | ) | ||||
Adjustments to cash due to consolidation of Aspire subcontracting entities | — | 197 | |||||
Total cash flows used in investing activities | $ | (131 | ) | $ | (332 | ) |
9
KBR, Inc. Condensed Consolidated Statements of Cash Flows (In millions) (Unaudited) | |||||||
Six Months Ended June 30, | |||||||
2019 | 2018 | ||||||
Cash flows from financing activities: | |||||||
Payments to reacquire common stock | $ | (3 | ) | $ | (3 | ) | |
Acquisition of remaining ownership interest in joint ventures | — | (56 | ) | ||||
Distributions to noncontrolling interests | (4 | ) | — | ||||
Payments of dividends to shareholders | (23 | ) | (23 | ) | |||
Net proceeds from issuance of common stock | 2 | 1 | |||||
Borrowings on revolving credit agreements | — | 250 | |||||
Borrowings on long-term debt | — | 959 | |||||
Payments on revolving credit agreements | — | (605 | ) | ||||
Payments on short-term and long-term borrowings | (47 | ) | (5 | ) | |||
Debt issuance costs | — | (46 | ) | ||||
Other | (3 | ) | — | ||||
Total cash flows (used in) provided by financing activities | $ | (78 | ) | $ | 472 | ||
Effect of exchange rate changes on cash | — | (24 | ) | ||||
(Decrease) increase in cash and equivalents | (128 | ) | 80 | ||||
Cash and equivalents at beginning of period | 739 | 439 | |||||
Cash and equivalents at end of period | $ | 611 | $ | 519 | |||
Supplemental disclosure of cash flows information: | |||||||
Cash paid for interest | $ | 37 | $ | 18 | |||
Cash paid for income taxes (net of refunds) | $ | 29 | $ | 16 | |||
Noncash financing activities | |||||||
Dividends declared | $ | 11 | $ | 11 |
10
KBR, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Description of Company and Significant Accounting Policies
KBR, Inc., a Delaware corporation, was formed on March 21, 2006, and is headquartered in Houston, Texas. KBR, Inc. and its wholly owned and majority-owned subsidiaries (collectively referred to herein as "KBR", the "Company", "we", "us" or "our") is a global provider of differentiated, professional services and technologies across the asset and program life-cycle within the government services and hydrocarbons industries. Our capabilities include research and development, feasibility and solutions development, specialized technical consulting, systems integration, engineering and design service, process technologies, program management, construction services, commissioning and startup services, highly specialized mission and logistics support solutions, and asset operations and maintenance services and other support services to a diverse customer base, including government and military organizations of the U.S., U.K. and Australia and a wide range of customers across the hydrocarbons value chain.
The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements do not include all information or notes required by general accepted accounting principles for annual financial statements and should be read together with our 2018 Annual Report on Form 10-K.
The condensed consolidated financial statements include all normal and recurring adjustments necessary to present fairly our financial position as of June 30, 2019 and the results of our operations for the three and six month ended June 30, 2019 and 2018, and our cash flows for the six months ended June 30, 2019 and 2018.
Our significant accounting policies are detailed in "Note 1. Description of Company and Significant Accounting Policies" of our Annual Report on Form 10-K for the year ended December 31, 2018.
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.
Principles of Consolidation
Our condensed consolidated financial statements include the accounts of KBR and our wholly owned and majority-owned subsidiaries and VIEs of which we are the primary beneficiary. We account for investments over which we have significant influence but not a controlling financial interest using the equity method of accounting. See Note 10 to our condensed consolidated financial statements for further discussion on our equity investments and VIEs. The cost method is used when we do not have the ability to exert significant influence. All material intercompany transactions are eliminated in consolidation.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation in our condensed consolidated statements of operations. We have elected to classify certain indirect costs incurred as overhead (included in "Cost of revenues") or general administrative expenses for U.S. GAAP reporting purposes in the same manner as such costs are defined in our disclosure statements under CAS. Effective January 1, 2019, we established a new CAS structure and revised our disclosure statements accordingly to reflect the related cost accounting practice changes. Consequently, for the three and six months ended June 30, 2018, $31 million and $67 million, respectively, was reclassified from "Cost of revenues" to "Selling, general and administrative expenses" on our condensed consolidated statement of operations.
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, 2018 | June 30, 2018 | ||||||||||||||
Dollars in millions | As Reported | As Previously Reported | As Reported | As Previously Reported | |||||||||||
Statement of Operations | |||||||||||||||
Cost of revenues | $ | (1,106 | ) | $ | (1,137 | ) | $ | (2,027 | ) | $ | (2,094 | ) | |||
Selling, general and administrative expenses | (72 | ) | (41 | ) | (143 | ) | (76 | ) |
11
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 consist of the following five reportable segments:
• | Government Solutions |
• | Technology Solutions |
• | Energy Solutions |
• | Non-strategic Business |
• | Other |
See Note 2 to our condensed consolidated financial statements for further discussion on our segments. We have presented our segment results reflecting these changes for all periods presented. In conjunction with the change in segments, we evaluated goodwill associated with each of our reporting units using Level 3 fair value inputs, and no impairment indicators were identified.
Impact of Adoption of New Accounting Standards
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 16. 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 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:
12
Balance at | Adjustments Due to | Balance at | |||||||||
December 31, 2018 | ASC 842 | January 1, 2019 | |||||||||
Dollars in millions | |||||||||||
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 |
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.
In August 2018, the SEC adopted the final rules under SEC Release No. 33-10532, Disclosure Update and Simplification. The final rules amend the interim financial statement requirements to require a reconciliation of changes in stockholders’ equity in the notes or as a separate statement. The analysis should reconcile the beginning and ending balances of each caption in stockholders’ equity for each period in which an income statement is presented. The final rules were effective on November 5, 2018. See Note 17 for the reconciliation of shareholders’ equity.
Additional Balance Sheet Information
Other Current Liabilities
The components of "Other current liabilities" on our condensed consolidated balance sheets as of June 30, 2019, and December 31, 2018, are presented below:
13
June 30, | December 31, | ||||||
Dollars in millions | 2019 | 2018 | |||||
Current maturities of long-term debt | $ | 27 | $ | 22 | |||
Retainage payable | 37 | 33 | |||||
Income taxes payable | 25 | 30 | |||||
Value-added tax payable | 38 | 33 | |||||
Dividend payable | 11 | 11 | |||||
Other miscellaneous liabilities | 37 | 50 | |||||
Total other current liabilities | $ | 175 | $ | 179 |
Other Liabilities
"Other liabilities" on our condensed 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 above under "Impact of Adoption of New Accounting Standards" for further discussion.
Note 2. Business Segment Information
We are organized into three core business segments Government Solutions, Technology Solutions, and Energy Solutions and two non-core business segments. Our three core business segments provide full life cycle professional services, project solutions and technologies across two primary verticals, government and hydrocarbon. Our two non-core business segments are our Non-strategic Business segment, which includes businesses we intend to exit upon completion of existing contracts because they are no longer a part of our future strategic focus, and "Other," which includes our corporate expenses and selling, general and administrative expenses not allocated to the other business segments. Our business segments are described below:
Government Solutions. Our GS business segment provides full life-cycle support solutions to defense, space, aviation and other programs and missions for military and other government agencies in the U.S., U.K. and Australia. As program management integrator, KBR covers the full spectrum of defense, space, aviation and other government programs and missions from research and development; through systems engineering, test and evaluation, systems integration and program management; to operations support, maintenance and field logistics. Our acquisitions as described in Note 4 to our condensed consolidated financial statements have been combined with our existing operations within this business segment.
Technology Solutions. Our TS business segment combines KBR's proprietary technologies, equipment and catalyst supply and associated knowledge-based services into a global business for refining, petrochemicals, inorganic and specialty chemicals as well as gasification, syngas, ammonia, nitric acid and fertilizers. From early planning through scope definition, advanced technologies and project life-cycle support, our TS business segment works closely with customers to provide the optimal approach to maximize their return on investment.
Energy Solutions. Our ES business segment provides comprehensive project and program delivery capability globally. Our key capabilities leverage our operational and technical excellence as a global provider of EPC for onshore oil and gas; LNG/GTL; oil refining; petrochemicals; chemicals; fertilizers; offshore oil and gas (shallow-water, deep-water and subsea); floating solutions (FPUs, FPSO, FLNG & FSRU); maintenance services; and consulting services.
Non-strategic Business. Our Non-strategic Business segment represents the operations or activities that we intend to exit upon completion of existing contracts. All Non-Strategic Business projects are substantially complete. We continue to finalize project close-out activities and negotiate the settlement of claims and various other matters associated with these projects.
Other. Our Other 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 of consolidation of Aspire entities, and operating income (loss) by reporting segment.
Operations by Reportable Segment
14
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Dollars in millions | |||||||||||||||
Revenues: | |||||||||||||||
Government Solutions | $ | 1,033 | $ | 868 | $ | 2,008 | $ | 1,545 | |||||||
Technology Solutions | 93 | 72 | 185 | 134 | |||||||||||
Energy Solutions | 296 | 327 | 568 | 626 | |||||||||||
Subtotal | 1,422 | 1,267 | 2,761 | 2,305 | |||||||||||
Non-strategic Business | — | — | 1 | — | |||||||||||
Total revenues | $ | 1,422 | $ | 1,267 | $ | 2,762 | $ | 2,305 | |||||||
Gross profit (loss): | |||||||||||||||
Government Solutions | $ | 112 | $ | 85 | $ | 202 | $ | 155 | |||||||
Technology Solutions | 26 | 27 | 53 | 48 | |||||||||||
Energy Solutions | 22 | 49 | 58 | 77 | |||||||||||
Subtotal | 160 | 161 | 313 | 280 | |||||||||||
Non-strategic Business | — | — | — | (2 | ) | ||||||||||
Total gross profit | $ | 160 | $ | 161 | $ | 313 | $ | 278 | |||||||
Equity in earnings of unconsolidated affiliates: | |||||||||||||||
Government Solutions | $ | 8 | $ | 6 | $ | 14 | $ | 14 | |||||||
Energy Solutions | 7 | 6 | 1 | 19 | |||||||||||
Subtotal | 15 | 12 | 15 | 33 | |||||||||||
Non-strategic Business | — | — | — | — | |||||||||||
Total equity in earnings of unconsolidated affiliates | $ | 15 | $ | 12 | $ | 15 | $ | 33 | |||||||
Selling, general and administrative expenses: | |||||||||||||||
Government Solutions | $ | (35 | ) | $ | (26 | ) | $ | (65 | ) | $ | (49 | ) | |||
Technology Solutions | (7 | ) | (6 | ) | (14 | ) | (12 | ) | |||||||
Energy Solutions | (16 | ) | (19 | ) | (32 | ) | (40 | ) | |||||||
Other | (30 | ) | (21 | ) | (55 | ) | (42 | ) | |||||||
Subtotal | (88 | ) | (72 | ) | (166 | ) | (143 | ) | |||||||
Non-strategic Business | — | — | — | — | |||||||||||
Total selling, general and administrative expenses | $ | (88 | ) | $ | (72 | ) | $ | (166 | ) | $ | (143 | ) | |||
Acquisition and integration related costs: | |||||||||||||||
Government Solutions | $ | (1 | ) | $ | (1 | ) | $ | (2 | ) | $ | (4 | ) | |||
Technology Solutions | — | — | — | — | |||||||||||
Energy Solutions | — | — | — | — | |||||||||||
Other | — | — | — | — | |||||||||||
Subtotal | (1 | ) | (1 | ) | (2 | ) | (4 | ) | |||||||
Non-strategic Business | — | — | — | — | |||||||||||
Total acquisition and integration related costs | $ | (1 | ) | $ | (1 | ) | $ | (2 | ) | $ | (4 | ) | |||
Gain on disposition of assets: | |||||||||||||||
Government Solutions | $ | 7 | $ | — | $ | 11 | $ | — | |||||||
Technology Solutions | — | — | — | — | |||||||||||
Energy Solutions | — | — | — | — | |||||||||||
Other | (1 | ) | — | (1 | ) | — | |||||||||
Subtotal | 6 | — | 10 | — | |||||||||||
Non-strategic Business | — | — | — | — | |||||||||||
Total gain on disposition of assets | $ | 6 | $ | — | $ | 10 | $ | — | |||||||
Gain on consolidation of Aspire entities: | |||||||||||||||
Government Solutions | $ | — | $ | — | $ | — | $ | 120 |
15
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Dollars in millions | |||||||||||||||
Technology Solutions | — | — | — | — | |||||||||||
Energy Solutions | — | — | — | — | |||||||||||
Other | — | — | — | (5 | ) | ||||||||||
Subtotal | — | — | — | 115 | |||||||||||
Non-strategic Business | — | — | — | — | |||||||||||
Total gain on consolidation of Aspire entities | $ | — | $ | — | $ | — | $ | 115 | |||||||
Segment operating income (loss): | |||||||||||||||
Government Solutions | $ | 90 | $ | 64 | $ | 160 | $ | 236 | |||||||
Technology Solutions | 19 | 21 | 39 | 36 | |||||||||||
Energy Solutions | 13 | 36 | 27 | 57 | |||||||||||
Other | (30 | ) | (21 | ) | (56 | ) | (48 | ) | |||||||
Subtotal | 92 | 100 | 170 | 281 | |||||||||||
Non-strategic Business | — | — | — | (2 | ) | ||||||||||
Total segment operating income (loss) | $ | 92 | $ | 100 | $ | 170 | $ | 279 |
Changes in Project-related Estimates
There are many factors that may affect the accuracy of our cost estimates and ultimately our future profitability. These include, but are not limited to, the availability and costs of resources (such as labor, materials and equipment), productivity and weather, and for unit rate and construction service contracts, the availability and detail of customer supplied engineering drawings. With a portfolio of more than one thousand contracts, we sometimes realize both lower and higher than expected margins on projects in any given period. We recognize revisions of revenues and costs in the period in which the revisions are known. This may result in the recognition of costs before the recognition of related revenue recovery, if any.
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Note 3. Revenue
We disaggregate our revenue from customers by type of service, geographic destination and contract type for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.
Revenue by Service/Product line and reportable segment was as follows:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
Dollars in millions | 2019 | 2018 | 2019 | 2018 | |||||||||||
By Service / Product Types | |||||||||||||||
Government Solutions | |||||||||||||||
Space and Mission Solutions | $ | 225 | $ | 169 | $ | 422 | $ | 247 | |||||||
Engineering | 303 | 302 | 594 | 554 | |||||||||||
Logistics | 505 | 397 | 992 | 744 | |||||||||||
Total Government Solutions | 1,033 | 868 | 2,008 | 1,545 | |||||||||||
Technology Solutions | 93 | 72 | 185 | 134 | |||||||||||
Energy Solutions | |||||||||||||||
EPC Delivery Projects | 75 | 138 | 154 | 258 | |||||||||||
Services and Consulting | 221 | 189 | 414 | 368 | |||||||||||
Total Energy Solutions | 296 | 327 | 568 | 626 | |||||||||||
Non-strategic business | — | — | 1 | — | |||||||||||
Total net revenue | $ | 1,422 | $ | 1,267 | $ | 2,762 | $ | 2,305 |
Government Solutions revenue earned from key U.S. government customers including U.S. DoD agencies and NASA was $808 million and $637 million for the three months ended June 30, 2019 and 2018, respectively, and $1.6 billion and $1.1 billion for the six months ended June 30, 2019 and 2018, respectively. Government Solutions revenue earned from non-U.S. government customers including the U.K. MoD, the Australian Defence Force and others was $225 million and $231 million for the three months ended June 30, 2019 and 2018, respectively, and $437 million and $416 million for the six months ended June 30, 2019 and 2018, respectively.
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Revenue by geographic destination was as follows:
Three Months Ended June 30, 2019 | |||||||||||||||||||
Total by Countries/Regions Dollars in millions | Government Solutions | Technology Solutions | Energy Solutions | Non-strategic Business | Total | ||||||||||||||
United States | $ | 553 | $ | 5 | $ | 110 | $ | — | $ | 668 | |||||||||
Middle East | 241 | 3 | 58 | — | 302 | ||||||||||||||
Europe | 182 | 20 | 47 | — | 249 | ||||||||||||||
Australia | 23 | — | 46 | — | 69 | ||||||||||||||
Canada | — | — | 5 | — | 5 | ||||||||||||||
Africa | 18 | 13 | 19 | — | 50 | ||||||||||||||
Asia | — | 52 | 1 | — | 53 | ||||||||||||||
Other countries | 16 | — | 10 | — | 26 | ||||||||||||||
Total net revenue | $ | 1,033 | $ | 93 | $ | 296 | $ | — | $ | 1,422 | |||||||||
Three Months Ended June 30, 2018 | |||||||||||||||||||
Total by Countries/Regions Dollars in millions | Government Solutions | Technology Solutions | Energy Solutions | Non-strategic Business | Total | ||||||||||||||
United States | $ | 431 | $ | 4 | $ | 125 | $ | — | $ | 560 | |||||||||
Middle East | 183 | 4 | 31 | — | 218 | ||||||||||||||
Europe | 208 | 13 | 52 | — | 273 | ||||||||||||||
Australia | 15 | — | 95 | — | 110 | ||||||||||||||
Canada | — | — | 4 | — | 4 | ||||||||||||||
Africa | 20 | 5 | 4 | — | 29 | ||||||||||||||
Asia | — | 44 | 4 | — | 48 | ||||||||||||||
Other countries | 11 | 2 | 12 | — | 25 | ||||||||||||||
Total net revenue | $ | 868 | $ | 72 | $ | 327 | $ | — | $ | 1,267 |
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Six Months Ended June 30, 2019 | |||||||||||||||||||
Total by Countries/Regions Dollars in millions | Government Solutions | Technology Solutions | Energy Solutions | Non-strategic Business | Total | ||||||||||||||
United States | $ | 1,074 | $ | 10 | $ | 211 | $ | 1 | $ | 1,296 | |||||||||
Middle East | 439 | 8 | 102 | — | 549 | ||||||||||||||
Europe | 381 | 34 | 88 | — | 503 | ||||||||||||||
Australia | 44 | — | 99 | — | 143 | ||||||||||||||
Canada | — | — | 7 | — | 7 | ||||||||||||||
Africa | 40 | 18 | 37 | — | 95 | ||||||||||||||
Asia | — | 113 | 3 | — | 116 | ||||||||||||||
Other countries | 30 | 2 | 21 | — | 53 | ||||||||||||||
Total net revenue | $ | 2,008 | $ | 185 | $ | 568 | $ | 1 | $ | 2,762 | |||||||||
Six Months Ended June 30, 2018 | |||||||||||||||||||
Total by Countries/Regions Dollars in millions | Government Solutions | Technology Solutions | Energy Solutions | Non-strategic Business | Total | ||||||||||||||
United States | $ | 745 | $ | 10 | $ | 251 | $ | — | $ | 1,006 | |||||||||
Middle East | 348 | 11 | 61 | — | 420 | ||||||||||||||
Europe | 364 | 21 | 98 | — | 483 | ||||||||||||||
Australia | 28 | 1 | 167 | — | 196 | ||||||||||||||
Canada | — | 2 | 15 | — | 17 | ||||||||||||||
Africa | 38 | 12 | 6 | — | 56 | ||||||||||||||
Asia | — | 75 | 6 | — | 81 | ||||||||||||||
Other countries | 22 | 2 | 22 | — | 46 | ||||||||||||||
Total net revenue | $ | 1,545 | $ | 134 | $ | 626 | $ | — | $ | 2,305 |
Many of our contracts contain both fixed price and cost reimbursable components. We define contract type based on the component that represents the majority of the contract. Revenue by contract type was as follows:
Three Months Ended June 30, 2019 | |||||||||||||||||||
Dollars in millions | Government Solutions | Technology Solutions | Energy Solutions | Non-strategic Business | Total | ||||||||||||||
Fixed Price | $ | 284 | $ | 92 | $ | 51 | $ | — | $ | 427 | |||||||||
Cost Reimbursable | 749 | 1 | 245 | — | 995 | ||||||||||||||
Total net revenue | $ | 1,033 | $ | 93 | $ | 296 | $ | — | $ | 1,422 | |||||||||
Three Months Ended June 30, 2018 | |||||||||||||||||||
Dollars in millions | Government Solutions | Technology Solutions | Energy Solutions | Non-strategic Business | Total | ||||||||||||||
Fixed Price | $ | 283 | $ | 68 | $ | 48 | $ | — | $ | 399 | |||||||||
Cost Reimbursable | 585 | 4 | 279 | — | 868 | ||||||||||||||
Total net revenue | $ | 868 | $ | 72 | $ | 327 | $ | — | $ | 1,267 |
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Six Months Ended June 30, 2019 | |||||||||||||||||||
Dollars in millions | Government Solutions | Technology Solutions | Energy Solutions | Non-strategic Business | Total | ||||||||||||||
Fixed Price | $ | 556 | $ | 183 | $ | 88 | $ | 1 | $ | 828 | |||||||||
Cost Reimbursable | 1,452 | 2 | 480 | — | 1,934 | ||||||||||||||
Total net revenue | $ | 2,008 | $ | 185 | $ | 568 | $ | 1 | $ | 2,762 | |||||||||
Six Months Ended June 30, 2018 | |||||||||||||||||||
Dollars in millions | Government Solutions | Technology Solutions | Energy Solutions | Non-strategic Business | Total | ||||||||||||||
Fixed Price | $ | 501 | $ | 127 | $ | 104 | $ | — | $ | 732 | |||||||||
Cost Reimbursable | 1,044 | 7 | 522 | — | 1,573 | ||||||||||||||
Total net revenue | $ | 1,545 | $ | 134 | $ | 626 | $ | — | $ | 2,305 |
We recognized revenue from performance obligations satisfied in previous periods of $5 million and $30 million for the three months ended June 30, 2019 and 2018, respectively, and $13 million, and $31 million for the six months ended June 30, 2019 and 2018, respectively.
On June 30, 2019, we had $10.3 billion of transaction price allocated to remaining performance obligations. We expect to recognize approximately 35% of our remaining performance obligations as revenue within one year, 31% in years two through five, and 34% thereafter. Revenue associated with our remaining performance obligations to be recognized beyond one year includes performance obligations related to Aspire Defence and Fasttrax projects, which have contract terms extending through 2041 and 2023, respectively. The balance of remaining performance obligations does not include variable consideration that was determined to be constrained as of June 30, 2019.
We adopted ASU No. 2014-09 (ASC Topic 606), Revenue from Contracts with Customers and related ASUs in the first quarter of 2018. See the 2018 10-K for a further discussion of the adoption and the impact on our financial statements. In accordance with ASU No. 2017-13, certain of our unconsolidated joint ventures will not adopt ASC Topic 606 until the fourth quarter of 2019.
Note 4. Acquisitions, Dispositions and Other Transactions
Stinger Ghaffarian Technologies Acquisition
On April 25, 2018, we acquired 100% of the outstanding stock of SGT. SGT is a leading provider of high-value engineering, mission operations, scientific and IT software solutions in the government services market. We accounted for this transaction using the acquisition method under ASC 805, Business Combinations. The acquisition is reported within our GS business segment. Aggregate base consideration for the acquisition was $355 million, plus $10 million of working capital and other purchase price adjustments set forth in the purchase agreement. We recognized goodwill of $257 million arising from the acquisition.
We recognized direct, incremental costs related to this acquisition of $1 million and $2 million during the three and six months ended June 30, 2019, respectively, and $1 million and $3 million during the three and six months ended June 30, 2018, respectively. These costs are included in "Acquisition and integration related costs" on the condensed consolidated statements of operations.
The acquired SGT business contributed $128 million and $243 million of revenues and $11 million and $20 million of gross profit for the three and six months ended June 30, 2019, respectively, and contributed $90 million of revenues and $7 million of gross profit for the period ended April 25, 2018 through June 30, 2018, within our GS business segment.
Consolidation of Aspire Defence Subcontracting Entities
On January 15, 2018, Carillion, our U.K. partner in the joint ventures that provide the construction and related support services to Aspire Defence Limited, entered into compulsory liquidation and ceased performing services for the project. In accordance with the commercial arrangements of the project company and its lenders, Carillion was excluded from future business and benefit from its interest in the project and we assumed operational management and control of the subcontracting entities.
20
As a result of Carillion's compulsory liquidation, KBR was deemed the primary beneficiary as it has the power to direct activities having the most significant impact on the economic performance of the subcontracting entities. Consequently, KBR began consolidating these entities in its financial statements effective January 15, 2018. We accounted for these transactions under the acquisition method of accounting for business combinations in accordance ASC 805 and recognized a gain of approximately $115 million included in "Gain on consolidation of Aspire 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.
On April 18, 2018, we completed the acquisition of Carillion's interests in the subcontracting entities 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 KBR's interest as an equity transaction. The difference between the noncontrolling interests of $124 million in the subcontracting entities at the date of acquisition and the cash consideration paid to Carillion was recognized as a net increase to "PIC" of $74 million. We incurred acquisition-related costs of $1 million for the six months ended June 30, 2018, which were recorded in "Acquisition and integration related costs" on our condensed consolidated statements of operations. No acquisition-related costs were recorded for the six months ended June 30, 2019.
The results of operations of the subcontracting entities have been included in our condensed consolidated statements of operations for periods subsequent to assuming control on January 15, 2018. The acquired subcontracting entities contributed $134 million and $267 million of revenues and $20 million and $32 million of gross profit for the three and six months ended June 30, 2019, respectively, and contributed $144 million and $249 million of revenues and $15 million and $28 million of gross profit for the three and six months ended June 30, 2018, respectively, within our GS business segment.
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 the historical financial information of SGT and the Aspire Defence subcontracting entities and has been adjusted to give effect to pro forma adjustments that are both directly attributable to the transaction and factually supportable. Pro forma adjustments were primarily related to the amortization of intangibles, interest on borrowings related to the acquisitions, and the reclassification of the gain on consolidation of the Aspire entities to January 1, 2017. 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, nor is it indication of future results of operations.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||
2018 | 2018 | ||||||
Dollars in millions | |||||||
Revenue | $ | 1,291 | $ | 2,453 | |||
Net income attributable to KBR | 44 | 86 | |||||
Diluted earnings per share | $ | 0.31 | $ | 0.61 |
Note 5. Cash and Equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and equivalents include cash balances held by our wholly owned subsidiaries as well as cash held by joint ventures that we consolidate. Joint venture and the Aspire project cash balances are limited to specific project activities and are not available for other projects, general cash needs or distribution to us without approval of the board of directors of the respective entities. We expect to use this cash for project costs and distributions of earnings. However, some of the earnings distributions may be paid to other KBR entities where the cash can be used for general corporate needs.
21
The components of our cash and equivalents balance are as follows:
June 30, 2019 | |||||||||||
Dollars in millions | International (a) | Domestic (b) | Total | ||||||||
Operating cash and equivalents | $ | 170 | $ | 112 | $ | 282 | |||||
Short-term investments (c) | 12 | 13 | 25 | ||||||||
Cash and equivalents held in consolidated joint ventures and Aspire Defence subcontracting entities | 299 | 5 | 304 | ||||||||
Total | $ | 481 | $ | 130 | $ | 611 |
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 |
(a) | Includes deposits held in non-U.S. operating accounts. |
(b) | Includes U.S. dollar and foreign currency deposits held in operating accounts that constitute onshore cash for tax purposes but may reside either in the U.S. or in a foreign country. |
(c) | Includes time deposits, money market funds, and other highly liquid short-term investments. |
Note 6. Accounts Receivable
The components of our accounts receivable, net of allowance for doubtful accounts balance, are as follows:
June 30, 2019 | |||||||||||
Dollars in millions | Unbilled | Trade & Other | Total | ||||||||
Government Solutions | $ | 374 | $ | 325 | $ | 699 | |||||
Technology Solutions | 9 | 57 | 66 | ||||||||
Energy Solutions | 97 | 173 | 270 | ||||||||
Subtotal | 480 | 555 | 1,035 | ||||||||
Non-strategic Business | — | — | — | ||||||||
Total | $ | 480 | $ | 555 | $ | 1,035 |
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 |
22
Note 7. Contract Assets and Contract Liabilities
Our contract assets by business segment are as follows:
June 30, | December 31, | ||||||
Dollars in millions | 2019 | 2018 | |||||
Government Solutions | $ | 125 | $ | 123 | |||
Technology Solutions | 27 | 19 | |||||
Energy Solutions | 50 | 43 | |||||
Subtotal | 202 | 185 | |||||
Non-strategic Business | — | — | |||||
Total | $ | 202 | $ | 185 |
Our contract liabilities by business segment are as follows:
June 30, | December 31, | ||||||
Dollars in millions | 2019 | 2018 | |||||
Government Solutions | $ | 296 | $ | 261 | |||
Technology Solutions | 82 | 98 | |||||
Energy Solutions | 106 | 100 | |||||
Subtotal | 484 | 459 | |||||
Non-strategic Business | 3 | 4 | |||||
Total | $ | 487 | $ | 463 |
We recognized revenue of $138 million for the six months ended June 30, 2019, that was previously included in the contract liability balance at December 31, 2018.
Note 8. Claims and Accounts Receivable
Our claims and accounts receivable balance not expected to be collected within the next 12 months was $100 million and $98 million as of June 30, 2019 and December 31, 2018, respectively. Claims and accounts receivable primarily reflect claims filed with the U.S. government related to payments not yet received 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 the amount is $73 million as of June 30, 2019, and December 31, 2018, related to Form 1s issued by the U.S. government questioning or objecting to costs billed to them. See Note 14 of our condensed consolidated financial statements for additional information. The amount also includes $27 million and $25 million as of June 30, 2019, and December 31, 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 resolution occurs.
Note 9. 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, including foreign currency effect | 11 | 10 | |||||
Approved change orders, net of foreign currency effect | (5 | ) | (1 | ) | |||
Amounts included in project estimates-at-completion at June 30, | $ | 979 | $ | 933 | |||
Amounts recognized over time based on progress at June 30, | $ | 966 | $ | 887 |
23
As of June 30, 2019, the predominant component of the change orders, customer claims and estimated recoveries of claims against suppliers and subcontractors above relates to our 30% proportionate share of unapproved change orders and claims associated with the Ichthys LNG Project discussed below.
KBR intends to vigorously pursue approval and collection of amounts still due under all 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, which has 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 substantially complete and the plant is producing LNG. All of the components of the plant, except for the combined cycle power plant ("Power Plant"), have been completed and handed over to the client. The Power Plant includes five gas turbine generators which are complete and handed over to the client, and three steam turbine generators (the "STGs") which are currently forecasted to be completed in 2019. We expect commissioning and hand-over of the STGs to be completed by mid-2019.
Unapproved Change Orders and Claims Against Client
Under the cost-reimbursable scope of the contract with the client, JKC has entered into commercial contracts with multiple suppliers and subcontractors to execute various scopes of work on the project. Certain of these suppliers and subcontractors have made contract claims against JKC for recovery of costs and extensions of time to progress the works under the scope of their respective contracts due to a variety of issues related to alleged changes to the scope of work, delays and lower than planned subcontractor productivity. In addition, JKC has incurred costs related to scope increases and other factors, and has made claims to its client for matters for which JKC believes it is entitled to reimbursement under the contract.
JKC believes 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 contract between JKC and its client. However, the client disputed some of these contract price adjustments and subsequently withheld certain payments. In order to facilitate the continuation of work under the contract while we worked to resolve this dispute, the client agreed to a contractual mechanism (“Funding Deed”) in 2016 providing funding in the form of an interim contract price adjustment to JKC and consented to settlement of subcontractor claims as of that date related to the cost-reimbursable scope. While the client 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 terms of the Funding Deed. We, along with our joint venture partners, are jointly and severally liable to the client for any amounts required to be refunded.
Our proportionate share of the total amount of the contract price adjustments under the Funding Deed included in the unapproved change orders and claims related to our unconsolidated affiliates discussed above was $159 million as of June 30, 2019 and December 31, 2018.
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 June 30, 2019. However, unlike amounts funded under the Funding Deed, there is no requirement to refund these amounts to the client by a certain date.
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In October 2018, JKC received a favorable ruling from an arbitration tribunal. 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 is undertaking 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 June 30, 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 portion of the facilities. JKC’s profit estimate at completion includes a portion of revenues and costs 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 proceedings against the paint manufacturer and initiated claims against the subcontractors. JKC has also made demands on insurance policies in respect of these matters. Proceedings and claims against the paint manufacturer, certain subcontractors and insurance policies are ongoing.
Combined Cycle Power Plant
Pursuant to JKC's fixed-price scope of its contract with its client, JKC awarded a fixed-price EPC contract to a subcontractor for the design, construction and commissioning of the 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 pursuing recourse against the Consortium to recover all of the costs to complete the Power Plant, plus the additional interest, and/or general damages by all means inclusive of calling bank guarantees provided by the Consortium partners. In April 2018, JKC prevailed in a legal action to call bank guarantees (bonds) and received funds totaling $52 million. Each of the Consortium partners has joint and several liability with respect to all obligations under the subcontract. JKC intends to pursue recovery of all additional amounts due from the Consortium via various legal remedies available to JKC.
Estimated costs to complete the Power Plant that have been determined to be probable of recovery from the Consortium under U.S. GAAP have been included as a reduction of cost in our estimate of profit at completion. The estimated recoveries exclude interest, liquidated damages and other related costs which JKC intends to pursue recovery from the Consortium. Amounts expected to be recovered from the Consortium are included in the table above.
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As of June 30, 2019, JKC claims against the Consortium were approximately $1.9 billion for recovery of JKC's costs. An arbitration hearing against the Consortium is scheduled in the first half 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.
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, financial position and planned cash flows. Additionally, to the extent JKC does not resolve this matter with the Consortium in the near term, the joint venture partners have been and will continue to be required to fund JKC's completion of the Power Plant which could have a material adverse effect on our financial position and cash flows.
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 and continue to fund our proportionate share of the working capital requirements of JKC to complete the project. During the year ended December 31, 2018, we made investment contributions to JKC of approximately $344 million to fund the ongoing project execution activities. During the six months ended June 30, 2019, we made additional investment contributions to JKC of approximately $126 million to fund the ongoing project execution activities. Our projection of total investment contributions to complete the project is approximately $500 million.
If our estimates to complete the project increase, or if we experience unfavorable outcomes associated with the various legal and commercial disputes, our projection of 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 June 30, 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.
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 June 30, 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.
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 10 to our condensed consolidated financial statements for further discussion regarding our equity method investment in JKC.
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Note 10. Equity Method Investments and Variable Interest Entities
We conduct some of our operations through joint ventures, which operate through partnership, corporation, undivided interest 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:
Six Months Ended June 30, | Year Ended December 31, | ||||||
2019 | 2018 | ||||||
Dollars in millions | |||||||
Beginning balance at January 1, | $ | 724 | $ | 365 | |||
Cumulative effect of change in accounting policy (a) | — | 87 | |||||
Adjusted balance at January 1, | 724 | 452 | |||||
Equity in earnings of unconsolidated affiliates | 15 | 79 | |||||
Distributions of earnings of unconsolidated affiliates | (45 | ) | (75 | ) | |||
Payments from (advances to) unconsolidated affiliates, net | (5 | ) | (12 | ) | |||
Investments (b) | 131 | 344 | |||||
Foreign currency translation adjustments | (7 | ) | (28 | ) | |||
Other | — | (36 | ) | ||||
Ending balance | $ | 813 | $ | 724 |
(a) | 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 adoption of ASC 606 by the Aspire Defence project joint ventures. |
(b) | For the six months ended June 30, 2019, investments include a $126 million investment to fund JKC. In 2018, the total amount of investments were made to fund JKC. |
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 June 30, 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 condensed consolidated balance sheets related to our unconsolidated VIEs in which we have a significant variable interest but are not the primary beneficiary.
June 30, 2019 | |||||||
Dollars in millions | Total Assets | Total Liabilities | |||||
Affinity joint venture (U.K. MFTS project) | $ | 15 | $ | 10 | |||
Aspire Defence Limited | $ | 66 | $ | 5 | |||
JKC joint venture (Ichthys LNG project) | $ | 542 | $ | 30 | |||
U.K. Road project joint ventures | $ | 39 | $ | 9 | |||
Middle East Petroleum Corporation (EBIC Ammonia project) | $ | 51 | $ | 1 |
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December 31, 2018 | |||||||
Dollars in millions | 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 |
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 six months ended June 30, 2019 and 2018, our revenues included $348 million and $351 million, respectively, related to the services we provided to our unconsolidated joint ventures, primarily the Aspire Defence Limited joint venture within our GS business segment and the JKC joint venture within our ES business segment.
Amounts included in our condensed consolidated balance sheets related to services we provided to our unconsolidated joint ventures as of June 30, 2019, and December 31, 2018 are as follows:
June 30, | December 31, | ||||||
Dollars in millions | 2019 | 2018 | |||||
Accounts receivable, net of allowance for doubtful accounts | $ | 32 | $ | 43 | |||
Contract assets (a) | $ | 4 | $ | 1 | |||
Contract liabilities (a) | $ | 37 | $ | 38 | |||
Accounts payable | $ | 1 | $ | 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 | June 30, 2019 | ||||||
Total Assets | Total Liabilities | ||||||
KJV-G joint venture (Gorgon LNG project) | $ | 12 | $ | 18 | |||
Fasttrax Limited (Fasttrax project) | $ | 46 | $ | 29 | |||
Aspire Defence subcontracting entities (Aspire Defence project) | $ | 554 | $ | 318 |
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 |
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Note 11. Pension Plans
The components of net periodic benefit cost related to pension benefits for the three and six months ended June 30, 2019 and 2018 were as follows:
Three Months Ended June 30, | |||||||||||||||
2019 | 2018 | ||||||||||||||
Dollars in millions | United States | Int’l | United States | Int’l | |||||||||||
Components of net periodic benefit cost | |||||||||||||||
Interest cost | — | 12 | — | 13 | |||||||||||
Expected return on plan assets | — | (19 | ) | (1 | ) | (20 | ) | ||||||||
Amortization of prior service cost | — | 1 | — | — | |||||||||||
Recognized actuarial loss | 1 | 4 | 1 | 7 | |||||||||||
Net periodic benefit cost | $ | 1 | $ | (2 | ) | $ | — | $ | — | ||||||
Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | ||||||||||||||
Dollars in millions | United States | Int’l | United States | Int’l | |||||||||||
Components of net periodic benefit cost | |||||||||||||||
Interest cost | 1 | 25 | 1 | 26 | |||||||||||
Expected return on plan assets | (1 | ) | (39 | ) | (2 | ) | (41 | ) | |||||||
Amortization of prior service cost | — | 1 | — | — | |||||||||||
Recognized actuarial loss | 1 | 8 | 1 | 14 | |||||||||||
Net periodic benefit cost | $ | 1 | $ | (5 | ) | $ | — | $ | (1 | ) |
For the six months ended June 30, 2019, we have contributed approximately $19 million of the $45 million we expect to contribute to our plans in 2019.
Note 12. Debt and Other Credit Facilities
Our outstanding debt consisted of the following at the dates indicated:
Dollars in millions | June 30, 2019 | December 31, 2018 | ||||||
Term Loan A | $ | 185 | $ | 190 | ||||
Term Loan B | 760 | 796 | ||||||
Convertible Notes | 350 | 350 | ||||||
Unamortized debt issuance costs - Term Loan A | (5 | ) | (5 | ) | ||||
Unamortized debt issuance costs and discount - Term Loan B | (16 | ) | (18 | ) | ||||
Unamortized debt issuance costs and discount - Convertible Notes | (59 | ) | (65 | ) | ||||
Total long-term debt | 1,215 | 1,248 | ||||||
Less: current portion | 27 | 22 | ||||||
Total long-term debt, net of current portion | $ | 1,188 | $ | 1,226 |
Senior Credit Facility
The senior secured credit facility ("Senior Credit Facility") consists of a $500 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 may only be used to fund investment contributions in JKC. See Note 9 to our condensed consolidated financial statements for a discussion on JKC.
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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 June 30, 2019, we were in compliance with our 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 effective interest rate on the liability component for the period is 6.50%. The amount of interest cost recognized relating to the contractual interest coupon was $2 million and to the amortization of the discount on the liability was $2 million for the three months ended June 30, 2019, and $4 million and $5 million, respectively, for the six months ended June 30, 2019.
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.
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. Letters of credit are provided to certain customers and counterparties in the ordinary course of business as credit support for contractual performance guarantees, advanced payments received from customers and future funding commitments. We have $1 billion in a committed line of credit under the Senior Credit Facility, comprised of the $500 million Revolver and $500 million PLOC. Additionally, we have approximately $339 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 June 30, 2019, with respect to our $500 million Revolver, we have no outstanding revolver borrowings and have issued $26 million of letters of credit. With respect to our PLOC, we have $98 million of outstanding letters of credit. With respect to our $339 million of uncommitted lines of credit, we have utilized $218 million for letters of credit as of June 30, 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 the Senior Credit Facility, none have expiry dates beyond the maturity date of the Senior Credit Facility. Of the total letters of credit outstanding,
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$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.
Nonrecourse Project Debt
Fasttrax Limited, a 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 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 a bridge loan totaling approximately £88.9 million. 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 bridge loan of approximately £12.2 million was replaced when joint venture partners funded their equity and subordinated debt contributions in 2005.
The secured bonds were issued in two classes consisting of Class A 3.5% Index Linked Bonds in the amount of £56.0 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 condensed consolidated financial statements.
Note 13. Income Taxes
The effective tax rate was approximately 27% for both the three and six months ended June 30, 2019, respectively. The effective tax rate was approximately 22% and 20% for the three and six months ended June 30, 2018, respectively. The effective tax rate for the six months ended June 30, 2019, as compared to the U.S. statutory rate of 21%, was primarily impacted by the rate differential on our foreign earnings including equity losses for which no tax benefit is available. The effective tax rate for the six months ending June 30, 2018 was impacted by a discrete tax expense as a result of obtaining control of the Aspire Defence project subcontracting joint ventures, which was recorded at a lower rate than our estimated annual tax rate for 2018.
Our estimated annual effective rate for 2019 is 26% excluding the effects of discrete items. Our estimated annual effective rate is subject to change based on the actual jurisdictions where our 2019 earnings are generated.
The valuation allowance for deferred tax assets as of June 30, 2019, and December 31, 2018, was $199 million and $207 million, respectively. The change in the valuation allowance was a decrease of $5 million and decrease of $67 million for the three months ended June 30, 2019 and 2018, respectively, and a decrease of $8 million and a decrease of $68 million for the six months ended June 30, 2019 and 2018, respectively. The valuation allowance 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. The decrease in the valuation allowance for the three and six month periods ended June 30, 2018 primarily related to changes in foreign tax credit carryforwards due to the refinement of provisional impacts recorded related to the Deemed Repatriation Transition Tax. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income, in the appropriate character and source, during the periods in which those temporary differences become deductible or within the remaining carryforward period. 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.
The provision for uncertain tax positions included in "Other liabilities" and "Deferred income taxes" on our condensed consolidated balance sheets as of June 30, 2019, and December 31, 2018, was $90 million.
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Note 14. 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, and the DCMA 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 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 closeout of the LogCAP III contract since 2011, and we expect the closeout process to continue through at least 2019. 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 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 involving U.S. government contracts. We anticipate billing additional labor, vendor resolution and litigation costs as we resolve the open matters.
Form 1s
The U.S. government has issued Form 1s questioning or objecting to costs we billed to them under cost reimbursable contracts primarily related to our use of private security and our provision of containerized housing under the LogCAP III contract discussed below. As a consequence of the issuance of the Form 1s, the U.S. government has withheld payment to us on outstanding invoices, pending resolution of these matters.
The U.S. government has issued and has outstanding Form 1s questioning $134 million of billed costs as of June 30, 2019. They had previously paid us $61 million of the questioned costs related to our services on these contracts. The remaining balance of $73 million as of June 30, 2019, is included on our condensed balance sheets in “Claims and accounts receivable". In addition, we have withheld $26 million from our subcontractors at June 30, 2019, related to these questioned costs, which is included in "Other current liabilities" on our condensed balance sheets.
While we continue to believe that the amounts we have invoiced 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 as of June 30, 2019, and December 31, 2018. The balance at June 30, 2019, is recorded in "Contract liabilities" and "Other liabilities" in the amounts of $25 million and $16 million, respectively. The balance at December 31, 2018, is 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 1s 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 $56 million in billings. The government had previously paid $11 million and has withheld payments of $45 million, which as of June 30, 2019, we have recorded as due from the government related to this matter in "Claims and accounts receivable" on our condensed consolidated balance sheets.
On June 16, 2014, we received a decision from the ASBCA which agreed with KBR's position (i) that the LogCAP III contract did not prohibit the use of PSCs to provide force protection to KBR or subcontractor personnel, (ii) that there was a need
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for force protection and (iii) that the costs were reasonable. The ASBCA also found that the U.S. Army breached its obligation to provide force protection. The U.S. Army appealed the decision.
On June 12, 2017, we received a second ruling from the ASBCA that we are entitled to recover the withheld costs in the approximate amount of $45 million plus interest related to the use of PSCs. The U.S. Army filed a notice of appeal on October 12, 2017.
On July 9, 2019 the Court of Appeals for the Federal Circuit upheld the ASBCA decision confirming the entire award including interest. Accordingly, we believe that we are entitled to reimbursement by the U.S. Army for the amounts charged by our subcontractors, even if they incurred costs for PSCs. We believe the likelihood that we will incur a loss related to this matter is remote, and therefore we have not accrued any loss provisions related to this matter.
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 for arbitration with the American Arbitration Association 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 condensed consolidated balance sheets with pay-when-paid terms in the contract. As of June 30, 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. Discovery is ongoing in this case and is expected to continue into 2019. We believe the allegations of fraud by the relators are without merit and, as of June 30, 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 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. 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 has been ongoing since 2015. The DOJ dropped claims on nine of the thirteen contracts on which they originally brought claims. Both parties have filed significant motions that would affect the scope and venue of the case and additional motions are expected. The court will set hearing and trial dates after addressing the pending motions. As of June 30, 2019, we have accrued our best estimate of probable loss related to an unfavorable settlement of this matter in "Other liabilities" on our condensed 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
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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 has filed a notice of appeal. As of June 30, 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 15. 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. 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 2000’s. 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. 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.
Note 16. 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 89% of our lease obligations at June 30, 2019. 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 determining total future lease payments. As 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.
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The components of lease costs for the six months ended June 30, 2019 were as follows:
June 30, | |||
Dollars in millions | 2019 | ||
Operating lease cost | $ | 29 | |
Short-term lease cost | 47 | ||
Total lease cost | $ | 76 |
Total short-term lease commitments as of June 30, 2019 was approximately $62 million. Additional information related to leases was as follows:
June 30, | |||
Dollars in millions | 2019 | ||
Cash paid for amounts included in the measurement of lease liabilities | |||
Operating cash flows from operating leases | $ | 30 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 19 | |
Weighted-average remaining lease term-operating (in years) | 8.0 | ||
Weighted-average discount rate-operating leases | 7.6 | % |
The following is a maturity analysis of the future undiscounted cash flows associated with our operating lease liabilities as of June 30, 2019:
Year | |||||||||||||||||||||||||||
Dollars in millions | 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | Total | ||||||||||||||||||||
Future payments - operating leases | $ | 27 | $ | 53 | $ | 43 | $ | 35 | $ | 31 | $ | 143 | $ | 332 |
Dollars in millions | Operating Leases | ||
Total future payments | $ | 332 | |
Less imputed interest | (89 | ) | |
Present value of future lease payments | $ | 243 | |
Less current portion of lease obligations | (40 | ) | |
Noncurrent portion of lease obligations | $ | 203 |
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Note 17. Shareholders’ Equity
The following tables summarize our activity in shareholders’ equity:
Total | PIC | Retained Earnings | Treasury Stock | AOCL | NCI | ||||||||||||||||||
Dollars in millions | |||||||||||||||||||||||
Balance at March 31, 2019 | $ | 1,773 | $ | 2,194 | $ | 1,285 | $ | (818 | ) | $ | (910 | ) | 22 | ||||||||||
Share-based compensation | 2 | 2 | — | — | — | — | |||||||||||||||||
Common stock issued upon exercise of stock options | 1 | 1 | — | — | — | — | |||||||||||||||||
Dividends declared to shareholders | (12 | ) | — | (12 | ) | — | — | — | |||||||||||||||
Repurchases of common stock | — | — | — | — | — | — | |||||||||||||||||
Issuance of ESPP shares | — | — | — | — | — | — | |||||||||||||||||
Distributions to noncontrolling interests | (4 | ) | — | — | — | — | (4 | ) | |||||||||||||||
Net income | 50 | — | 48 | — | — | 2 | |||||||||||||||||
Other comprehensive income, net of tax | (16 | ) | — | — | — | (16 | ) | — | |||||||||||||||
Balance at June 30, 2019 | $ | 1,794 | $ | 2,197 | $ | 1,321 | $ | (818 | ) | $ | (926 | ) | $ | 20 | |||||||||
Total | PIC | Retained Earnings | Treasury Stock | AOCL | NCI | ||||||||||||||||||
Dollars in millions | |||||||||||||||||||||||
Balance at December 31, 2018 | $ | 1,718 | $ | 2,190 | $ | 1,235 | $ | (817 | ) | $ | (910 | ) | $ | 20 | |||||||||
Cumulative adjustment for the adoption of ASC 842 | 21 | — | 21 | — | — | — | |||||||||||||||||
Adjusted balance at January 1, 2019 | 1,739 | 2,190 | 1,256 | (817 | ) | (910 | ) | 20 | |||||||||||||||
Share-based compensation | 5 | 5 | — | — | — | — | |||||||||||||||||
Common stock issued upon exercise of stock options | 2 | 2 | — | — | — | — | |||||||||||||||||
Dividends declared to shareholders | (23 | ) | — | (23 | ) | — | — | — | |||||||||||||||
Repurchases of common stock | (3 | ) | — | — | (3 | ) | — | — | |||||||||||||||
Issuance of ESPP shares | 2 | — | — | 2 | — | — | |||||||||||||||||
Distributions to noncontrolling interests | (4 | ) | — | — | — | — | (4 | ) | |||||||||||||||
Net income | 92 | — | 88 | — | — | 4 | |||||||||||||||||
Other comprehensive income, net of tax | (16 | ) | — | — | — | (16 | ) | — | |||||||||||||||
Balance at June 30, 2019 | $ | 1,794 | $ | 2,197 | $ | 1,321 | $ | (818 | ) | $ | (926 | ) | $ | 20 | |||||||||
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Total | PIC | Retained Earnings | Treasury Stock | AOCL | NCI | ||||||||||||||||||
Dollars in millions | |||||||||||||||||||||||
Balance at March 31, 2018 | $ | 1,608 | $ | 2,094 | $ | 1,123 | $ | (818 | ) | $ | (910 | ) | $ | 119 | |||||||||
Acquisition of noncontrolling interests in Aspire entities | (48 | ) | 74 | — | — | — | (122 | ) | |||||||||||||||
Share-based compensation | 3 | 3 | — | — | — | — | |||||||||||||||||
Dividends declared to shareholders | (11 | ) | — | (11 | ) | — | — | — | |||||||||||||||
Repurchases of common stock | (1 | ) | — | — | (1 | ) | — | — | |||||||||||||||
Issuance of ESPP shares | — | — | — | — | — | — | |||||||||||||||||
Other noncontrolling interests activity | (3 | ) | — | — | — | — | (3 | ) | |||||||||||||||
Net income | 64 | — | 44 | — | — | 20 | |||||||||||||||||
Other comprehensive income, net of tax | (24 | ) | — | — | — | (24 | ) | — | |||||||||||||||
Balance at June 30, 2018 | $ | 1,588 | $ | 2,171 | $ | 1,156 | $ | (819 | ) | $ | (934 | ) | $ | 14 | |||||||||
Total | PIC | Retained Earnings | Treasury Stock | AOCL | NCI | ||||||||||||||||||
Dollars in millions | |||||||||||||||||||||||
Balance at December 31, 2017 | $ | 1,197 | $ | 2,091 | $ | 854 | $ | (818 | ) | $ | (922 | ) | $ | (8 | ) | ||||||||
Cumulative effect of change in accounting policy, net of tax of $6 | 144 | — | 144 | — | — | — | |||||||||||||||||
Adjusted balance at January 1, 2018 | 1,341 | 2,091 | 998 | (818 | ) | (922 | ) | (8 | ) | ||||||||||||||
Consolidation and acquisition of noncontrolling interests in Aspire entities | 74 | 74 | — | — | — | — | |||||||||||||||||
Share-based compensation | 6 | 6 | — | — | — | — | |||||||||||||||||
Dividends declared to shareholders | (22 | ) | — | (22 | ) | — | — | — | |||||||||||||||
Repurchases of common stock | (3 | ) | — | — | (3 | ) | — | — | |||||||||||||||
Issuance of ESPP shares | 2 | — | — | 2 | — | — | |||||||||||||||||
Other noncontrolling interests activity | 1 | — | — | — | — | 1 | |||||||||||||||||
Net income | 201 | — | 180 | — | — | 21 | |||||||||||||||||
Other comprehensive income, net of tax | (12 | ) | — | — | — | (12 | ) | — | |||||||||||||||
Balance at June 30, 2018 | $ | 1,588 | $ | 2,171 | $ | 1,156 | $ | (819 | ) | $ | (934 | ) | $ | 14 |
AOCL, net of tax
June 30, | |||||||
2019 | 2018 | ||||||
Dollars in millions | |||||||
Accumulated foreign currency translation adjustments, net of tax of $2 and $1 | $ | (318 | ) | $ | (279 | ) | |
Pension and post-retirement benefits, net of tax of $211 and $225 | (585 | ) | (647 | ) | |||
Fair value of derivatives, net of tax of $3 and $0 | (23 | ) | (8 | ) | |||
Total AOCL | $ | (926 | ) | $ | (934 | ) |
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Changes in AOCL, net of tax, by component
Accumulated foreign currency translation adjustments | Accumulated pension liability adjustments | Changes in fair value of derivatives | Total | ||||||||||||
Dollars in millions | |||||||||||||||
Balance at December 31, 2018 | $ | (304 | ) | $ | (592 | ) | $ | (14 | ) | $ | (910 | ) | |||
Other comprehensive income adjustments before reclassifications | (14 | ) | — | (11 | ) | (25 | ) | ||||||||
Amounts reclassified from AOCL | — | 7 | 2 | 9 | |||||||||||
Net other comprehensive income (loss) | (14 | ) | 7 | (9 | ) | (16 | ) | ||||||||
Balance at June 30, 2019 | $ | (318 | ) | $ | (585 | ) | $ | (23 | ) | $ | (926 | ) |
Accumulated foreign currency translation adjustments | Accumulated pension liability adjustments | Changes in fair value of derivatives | Total | ||||||||||||
Dollars in millions | |||||||||||||||
Balance at December 31, 2017 | $ | (259 | ) | $ | (660 | ) | $ | (3 | ) | $ | (922 | ) | |||
Other comprehensive income adjustments before reclassifications | (25 | ) | — | (5 | ) | (30 | ) | ||||||||
Amounts reclassified from AOCL | 5 | 13 | — | 18 | |||||||||||
Net other comprehensive income (loss) | (20 | ) | 13 | (5 | ) | (12 | ) | ||||||||
Balance at June 30, 2018 | $ | (279 | ) | $ | (647 | ) | $ | (8 | ) | $ | (934 | ) |
Reclassifications out of AOCL, net of tax, by component
Six Months Ended June 30, | |||||||||
Dollars in millions | 2019 | 2018 | Affected line item on the Condensed Consolidated Statements of Operations | ||||||
Accumulated foreign currency adjustments | |||||||||
Reclassification of foreign currency adjustments | $ | — | $ | (5 | ) | Gain on consolidation of Aspire entities | |||
Tax benefit | — | — | Provision for income taxes | ||||||
Net accumulated foreign currency | $ | — | $ | (5 | ) | Net of tax | |||
Accumulated pension liability adjustments | |||||||||
Amortization of actuarial loss (a) | $ | (9 | ) | $ | (15 | ) | See (a) below | ||
Tax benefit | 2 | 2 | Provision for income taxes | ||||||
Net pension and post-retirement benefits | $ | (7 | ) | $ | (13 | ) | Net of tax | ||
Changes in fair value for derivatives | |||||||||
Foreign currency hedge and interest rate swap settlements | $ | (2 | ) | $ | — | Other non-operation income (expense) | |||
Tax benefit | — | — | Provision for income taxes | ||||||
Net changes in fair value of derivatives | $ | (2 | ) | $ | — | Net of tax |
(a) | This item is included in the computation of net periodic pension cost. See Note 11 to our condensed consolidated financial statements for further discussion. |
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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.
Note 18. Share Repurchases
Withheld to Cover Program
We 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-based equity awards under the KBR, Inc. 2006 Stock and Incentive Plan.
The table below presents information on our share repurchases activity under these programs:
Three Months Ended | Six Months Ended | |||||||||||||||||||
June 30, 2019 | June 30, 2019 | |||||||||||||||||||
Number of Shares | Average Price per Share | Dollars in Millions | Number of Shares | Average Price per Share | Dollars in Millions | |||||||||||||||
Withheld to cover shares | 13,233 | $ | 22.55 | — | 173,868 | $ | 19.98 | $ | 3 | |||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||
June 30, 2018 | June 30, 2018 | |||||||||||||||||||
Number of Shares | Average Price per Share | Dollars in Millions | Number of Shares | Average Price per Share | Dollars in Millions | |||||||||||||||
Withheld to cover shares | 16,321 | $ | 18.14 | 1 | 170,606 | $ | 15.69 | $ | 3 |
Note 19. Income per Share
Basic income per share is based upon the weighted average number of common shares outstanding during the period. Dilutive income per share includes additional common shares that would have been outstanding if potential common shares with a dilutive effect had been issued using the treasury stock method.
A reconciliation of the number of shares used for the basic and diluted income per share calculations is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
Shares in millions | 2019 | 2018 | 2019 | 2018 | |||||||
Basic weighted average common shares outstanding | 141 | 140 | 141 | 140 | |||||||
Stock options and restricted shares | — | 1 | — | 1 | |||||||
Diluted weighted average common shares outstanding | 141 | 141 | 141 | 141 |
For purposes of applying the two-class method in computing income per share, there were $0.4 million and $0.7 million net earnings allocated to participating securities, or a negligible amount per share, for the three and six months ended June 30, 2019, respectively. Net earnings allocated to participating securities for the three and six months ended June 30, 2018 were $0.3 million and $1.1 million, or a negligible amount per share and $0.01 per share, respectively. The diluted income per share calculation did not include 1.2 million and 1.5 million antidilutive weighted average shares for the three and six months ended June 30, 2019, respectively. The diluted income per share calculation did not include 1.7 million antidilutive weighted average shares for the three and six months ended June 30, 2018.
Note 20. Financial Instruments and Risk Management
Foreign currency risk. We conduct business globally in numerous currencies and are therefore exposed to foreign currency fluctuations. We may use derivative instruments to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. We do not use derivative instruments for speculative trading purposes. We generally utilize foreign exchange forwards and currency option contracts to hedge exposures associated with forecasted future cash flows and to hedge exposures present on our balance sheet.
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As of June 30, 2019, the gross notional value of our foreign currency exchange forwards and option contracts used to hedge balance sheet exposures was $106 million, all of which had durations of 24 days or less. We also had approximately
$11 million (gross notional value) of cash flow hedges which had durations of 19 months or less. The cash flow hedges are primarily related to the British Pound.
The fair value of our balance sheet and cash flow hedges included in "Other current assets" and "Other current liabilities" on our condensed consolidated balance sheets was immaterial at June 30, 2019, and December 31, 2018. The fair values of these derivatives are considered Level 2 under ASC 820, Fair Value Measurement, as they are based on quoted prices directly observable in active markets.
The following table summarizes the recognized changes in fair value of our balance sheet hedges offset by remeasurement of balance sheet positions. These amounts are recognized in our condensed consolidated statements of operations for the periods presented. The net of our changes in fair value of hedges and the remeasurement of our assets and liabilities is included in "Other non-operating income (expense)" on our condensed consolidated statements of operations.
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
Gains (losses) dollars in millions | 2019 | 2018 | 2019 | 2018 | |||||||||||
Balance Sheet Hedges - Fair Value | $ | — | $ | (1 | ) | $ | — | $ | 1 | ||||||
Balance Sheet Position - Remeasurement | 2 | 2 | 5 | (6 | ) | ||||||||||
Net | $ | 2 | $ | 1 | $ | 5 | $ | (5 | ) |
Interest rate risk. The Company uses interest rate swaps to reduce interest rate risk and to manage net interest expense. On October 10, 2018 we entered into interest rate swap agreements with a notional value of $500 million to manage the interest rate exposure on our variable rate loans. By entering into swap agreements, the Company converted the LIBOR rate based liability into a fixed rate liability for a four year period. Under the swap agreements, the Company receives one month LIBOR rate and pays monthly a fixed rate of 3.055% for the term of the swaps. The fair value of the interest rate swaps at June 30, 2019, was $23 million of which $6 million is included in current liabilities and $17 million is included long-term liabilities. The unrealized net losses on these interest rate swaps was $23 million and included in AOCL as of June 30, 2019. The fair value of the interest rate swaps at December 31, 2018 was $12 million of which $3 million is included in current liabilities and $9 million is included long-term liabilities. The unrealized net losses on these interest rate swaps was $12 million and included in AOCL as of December 31, 2018.
Note 21. Impact on Previously Issued Financial Statements for the Correction of an Error
During the second quarter ended June 30, 2019, we identified and corrected immaterial errors affecting previously issued financial statements related to the historical recognition of equity earnings associated with our interest in an unconsolidated joint venture in our ES business segment. These errors were primarily due to the impact of improperly calculated gains and losses on foreign currency transactions from 2013 through the first quarter of 2019.
As of March 31, 2019, the cumulative error for all periods previously reported was an overstatement of net income of approximately $23 million impacting “Equity in and advances to unconsolidated affiliates” in our consolidated balance sheets and “Equity in earnings of unconsolidated affiliates” in our consolidated statements of operations. The errors had no impact on our previously reported cash flows. We assessed the materiality, both quantitatively and qualitatively, in accordance with the SEC’s SAB No. 99 and SAB No. 108, and concluded these errors were not material to any of our previously issued quarterly or annual financial statements. In order to correctly present the errors noted above, previously issued financials statements have been revised and are presented as “As Corrected” in the tables below.
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The effect of the above corrections on the consolidated statement of operations for the fiscal years ended December 31, 2018, 2017 and 2016 are as follows:
Year Ended December 31, 2018 | |||||||||||
Revised Consolidated Statement of Operations Amounts: | As Previously Reported | Adjustments | As Corrected | ||||||||
Equity in earnings of unconsolidated affiliates | $ | 81 | $ | (2 | ) | $ | 79 | ||||
Operating income | $ | 470 | $ | (2 | ) | $ | 468 | ||||
Income before income taxes and noncontrolling interests | $ | 398 | $ | (2 | ) | $ | 396 | ||||
Provision for income taxes | $ | (88 | ) | $ | 2 | $ | (86 | ) | |||
Net income | $ | 310 | $ | — | $ | 310 | |||||
Net income attributable to KBR | $ | 281 | $ | — | $ | 281 | |||||
Net income attributable to KBR per share: | |||||||||||
Basic | $ | 1.99 | $ | — | $ | 1.99 | |||||
Diluted | $ | 1.99 | $ | — | $ | 1.99 | |||||
Other Comprehensive Income (loss), net of tax | |||||||||||
Foreign currency translation adjustments | $ | (49 | ) | $ | 4 | $ | (45 | ) | |||
Other comprehensive income (loss), net of tax | $ | 8 | $ | 4 | $ | 12 | |||||
Comprehensive income | $ | 318 | $ | 4 | $ | 322 | |||||
Comprehensive income attributable to KBR | $ | 289 | $ | 4 | $ | 293 |
Year Ended December 31, 2017 | |||||||||||
Revised Consolidated Statement of Operations Amounts: | As Previously Reported | Adjustments | As Corrected | ||||||||
Equity in earnings of unconsolidated affiliates | $ | 72 | $ | (2 | ) | $ | 70 | ||||
Operating income | $ | 266 | $ | (2 | ) | $ | 264 | ||||
Income before income taxes and noncontrolling interests | $ | 249 | $ | (2 | ) | $ | 247 | ||||
Net income | $ | 442 | $ | (2 | ) | $ | 440 | ||||
Net income attributable to KBR | $ | 434 | $ | (2 | ) | $ | 432 | ||||
Net income attributable to KBR per share: | |||||||||||
Basic | $ | 3.06 | $ | (0.01 | ) | $ | 3.05 | ||||
Diluted | $ | 3.06 | $ | (0.01 | ) | $ | 3.05 | ||||
Other Comprehensive Income (loss), net of tax | |||||||||||
Foreign currency translation adjustments | $ | 3 | $ | (1 | ) | $ | 2 | ||||
Other comprehensive income (loss), net of tax | $ | 128 | $ | (1 | ) | $ | 127 | ||||
Comprehensive income | 570 | $ | (3 | ) | $ | 567 | |||||
Comprehensive income attributable to KBR | $ | 563 | $ | (3 | ) | $ | 560 |
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Year Ended December 31, 2016 | |||||||||||
Revised Consolidated Statement of Operations Amounts: | As Previously Reported | Adjustments | As Corrected | ||||||||
Equity in earnings of unconsolidated affiliates | $ | 91 | $ | (9 | ) | $ | 82 | ||||
Operating income | $ | 28 | $ | (9 | ) | $ | 19 | ||||
Income before income taxes and noncontrolling interests | $ | 33 | $ | (9 | ) | $ | 24 | ||||
Net income | $ | (51 | ) | $ | (9 | ) | $ | (60 | ) | ||
Net income attributable to KBR | $ | (61 | ) | $ | (9 | ) | $ | (70 | ) | ||
Net income attributable to KBR per share: | |||||||||||
Basic | $ | (0.43 | ) | $ | (0.06 | ) | $ | (0.49 | ) | ||
Diluted | $ | (0.43 | ) | $ | (0.06 | ) | $ | (0.49 | ) | ||
Other Comprehensive Income (loss), net of tax | |||||||||||
Foreign currency translation adjustments | $ | 7 | $ | — | $ | 7 | |||||
Other comprehensive income (loss), net of tax | $ | (219 | ) | $ | — | $ | (219 | ) | |||
Comprehensive income | $ | (270 | ) | $ | (9 | ) | $ | (279 | ) | ||
Comprehensive income attributable to KBR | $ | (280 | ) | $ | (9 | ) | $ | (289 | ) |
The effect of the above corrections on the consolidated balance sheets at December 31, 2018 and 2017 are as follows:
December 31, 2018 | |||||||||||
Revised Balance Sheet Amounts: | As Previously Reported | Adjustments | As Corrected | ||||||||
Equity in and advances to unconsolidated affiliates | $ | 744 | $ | (20 | ) | $ | 724 | ||||
Total assets | $ | 5,072 | $ | (20 | ) | $ | 5,052 | ||||
Deferred income taxes | $ | 27 | $ | — | $ | 27 | |||||
Total liabilities | $ | 3,334 | $ | — | $ | 3,334 | |||||
Total AOCL | $ | (913 | ) | $ | 3 | $ | (910 | ) | |||
Retained earnings | $ | 1,258 | $ | (23 | ) | $ | 1,235 | ||||
Total shareholders' equity | $ | 1,738 | $ | (20 | ) | $ | 1,718 | ||||
Total liabilities and shareholders' equity | $ | 5,072 | $ | (20 | ) | $ | 5,052 |
December 31, 2017 | |||||||||||
Revised Balance Sheet Amounts: | As Previously Reported | Adjustments | As Corrected | ||||||||
Equity in and advances to unconsolidated affiliates | $ | 387 | $ | (22 | ) | $ | 365 | ||||
Total assets | $ | 3,674 | $ | (22 | ) | $ | 3,652 | ||||
Deferred income taxes | $ | 18 | $ | 2 | $ | 20 | |||||
Total liabilities | $ | 2,453 | $ | 2 | $ | 2,455 | |||||
Total AOCL | $ | (921 | ) | $ | (1 | ) | $ | (922 | ) | ||
Retained earnings | $ | 877 | $ | (23 | ) | $ | 854 | ||||
Total shareholders' equity | $ | 1,221 | $ | (24 | ) | $ | 1,197 | ||||
Total liabilities and shareholders' equity | $ | 3,674 | $ | (22 | ) | $ | 3,652 |
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The effect of the above corrections on the consolidated statement of operations for three months ended March 31, 2019 and 2018 are as follow:
Three Months Ended March 31, 2019 | |||||||||||
Revised Consolidated Statement of Operations Amounts: | As Previously Reported | Adjustments | As Corrected | ||||||||
Equity in earnings of unconsolidated affiliates | $ | — | $ | — | $ | — | |||||
Operating income | $ | 78 | $ | — | $ | 78 | |||||
Income before income taxes and noncontrolling interests | $ | 58 | $ | — | $ | 58 | |||||
Net income | $ | 42 | $ | — | $ | 42 | |||||
Net income attributable to KBR | $ | 40 | $ | — | $ | 40 | |||||
Net income attributable to KBR per share: | |||||||||||
Basic | $ | 0.28 | $ | — | $ | 0.28 | |||||
Diluted | $ | 0.28 | $ | — | $ | 0.28 | |||||
Other Comprehensive Income (loss), net of tax | |||||||||||
Foreign currency translation adjustments | $ | 1 | $ | (2 | ) | $ | (1 | ) | |||
Other comprehensive income (loss), net of tax | $ | 2 | $ | (2 | ) | $ | — | ||||
Comprehensive income | $ | 44 | $ | (2 | ) | $ | 42 | ||||
Comprehensive income attributable to KBR | $ | 42 | $ | (2 | ) | $ | 40 |
Three Months Ended March 31, 2018 | |||||||||||
Revised Consolidated Statement of Operations Amounts: | As Previously Reported | Adjustments | As Corrected | ||||||||
Equity in earnings of unconsolidated affiliates | $ | 23 | $ | (2 | ) | $ | 21 | ||||
Operating income | $ | 181 | $ | (2 | ) | $ | 179 | ||||
Income before income taxes and noncontrolling interests | $ | 173 | $ | (2 | ) | $ | 171 | ||||
Net income | $ | 139 | $ | (2 | ) | $ | 137 | ||||
Net income attributable to KBR | $ | 138 | $ | (2 | ) | $ | 136 | ||||
Net income attributable to KBR per share: | |||||||||||
Basic | $ | 0.98 | $ | (0.02 | ) | $ | 0.96 | ||||
Diluted | $ | 0.97 | $ | (0.01 | ) | $ | 0.96 | ||||
Other Comprehensive Income (loss), net of tax | |||||||||||
Foreign currency translation adjustments | $ | 3 | $ | 3 | $ | 6 | |||||
Other comprehensive income (loss), net of tax | $ | 9 | $ | 3 | $ | 12 | |||||
Comprehensive income | $ | 148 | $ | 1 | $ | 149 | |||||
Comprehensive income attributable to KBR | $ | 147 | $ | 1 | $ | 148 |
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The effect of the above corrections on the consolidated statement of operations for three and six months ended June 30, 2018 are as follow:
Three Months Ended June 30, 2018 | |||||||||||
Revised Consolidated Statement of Operations Amounts: | As Previously Reported | Adjustments | As Corrected | ||||||||
Equity in earnings of unconsolidated affiliates | $ | 10 | $ | 2 | $ | 12 | |||||
Operating income | $ | 98 | $ | 2 | $ | 100 | |||||
Income before income taxes and noncontrolling interests | $ | 80 | $ | 2 | $ | 82 | |||||
Net income | $ | 62 | $ | 2 | $ | 64 | |||||
Net income attributable to KBR | $ | 42 | $ | 2 | $ | 44 | |||||
Net income attributable to KBR per share: | |||||||||||
Basic | $ | 0.30 | $ | 0.01 | $ | 0.31 | |||||
Diluted | $ | 0.30 | $ | 0.01 | $ | 0.31 | |||||
Other Comprehensive Income (loss), net of tax | |||||||||||
Foreign currency translation adjustments | $ | (26 | ) | $ | — | $ | (26 | ) | |||
Change in fair value of derivatives | $ | (4 | ) | $ | (1 | ) | $ | (5 | ) | ||
Other comprehensive income (loss), net of tax | $ | (23 | ) | $ | (1 | ) | $ | (24 | ) | ||
Comprehensive income | $ | 39 | $ | 1 | $ | 40 | |||||
Comprehensive income attributable to KBR | $ | 19 | $ | 1 | $ | 20 |
Six Months Ended June 30, 2018 | |||||||||||
Revised Consolidated Statement of Operations Amounts: | As Previously Reported | Adjustments | As Corrected | ||||||||
Equity in earnings of unconsolidated affiliates | $ | 33 | $ | — | $ | 33 | |||||
Operating income | $ | 279 | $ | — | $ | 279 | |||||
Income before income taxes and noncontrolling interests | $ | 253 | $ | — | $ | 253 | |||||
Net income | $ | 201 | $ | — | $ | 201 | |||||
Net income attributable to KBR | $ | 180 | $ | — | $ | 180 | |||||
Net income attributable to KBR per share: | |||||||||||
Basic | $ | 1.28 | $ | (0.01 | ) | $ | 1.27 | ||||
Diluted | $ | 1.27 | $ | — | $ | 1.27 | |||||
Other Comprehensive Income (loss), net of tax | |||||||||||
Foreign currency translation adjustments | $ | (23 | ) | $ | 3 | $ | (20 | ) | |||
Change in fair value of derivatives | $ | (4 | ) | $ | (1 | ) | $ | (5 | ) | ||
Other comprehensive income (loss), net of tax | $ | (14 | ) | $ | 2 | $ | (12 | ) | |||
Comprehensive income | $ | 187 | $ | 2 | $ | 189 | |||||
Comprehensive income attributable to KBR | $ | 166 | $ | 2 | $ | 168 |
Note 22. Recent Accounting Pronouncements
New accounting pronouncements requiring implementation in future periods are discussed below.
In November 2018, the FASB issued ASU No. 2018-18, Clarifying the Interaction Between Topic 808 and Topic 606 which clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. ASU No. 2018-18 is effective for interim and annual reporting periods beginning after December 15, 2019. We do not expect the adoption of ASU No. 2018-18 to have a material impact on our financial position, results of operations or cash flows.
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In October 2018, the FASB issued ASU No. 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities. This ASU amends the guidance for determining whether a decision-making fee is a variable interest. ASU No. 2018-17 is effective for interim and annual reporting periods beginning after December 15, 2019. We do not expect the adoption of ASU No. 2018-17 to have a material impact on our financial position, results of operations or cash flows.
In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU requires customers in a hosting arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. ASU No. 2018-15 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. We do not expect the adoption of ASU No. 2018-15 to have a material impact on our financial position, results of operations or cash flows.
In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU amends ASC 715 to add, remove and clarify certain disclosure requirements related to defined benefit pension and other postretirement plans. ASU No. 2018-14 is effective for fiscal years ending after December 15, 2020, with early adoption permitted. We do not expect the adoption of ASU No. 2018-14 to have any impact on our financial position, results of operations or cash flows.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU amends ASC 820 to add, remove and modify certain disclosure requirements for fair value measurements. For example, public companies will now be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. We do not expect the adoption of ASU No. 2018-13 to have any impact on our financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted, for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect adoption of this ASU to be material to our ongoing financial reporting or on known trends, demands, uncertainties and events in our business.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. This ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable supportable forecast and is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for annual periods after December 15, 2018, including interim periods within those annual periods. We are currently in the process of assessing the impact of this ASU on our financial statements. We have not yet determined the effect of the standard on our ongoing financial reporting or the future impact of adoption on known trends, demands, uncertainties and events in our business.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The purpose of MD&A is to disclose material 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 the condensed consolidated financial statements, accompanying notes, and our 2018 Annual Report on Form 10-K.
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Overview
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 this quarter, in Notes 1 and 2 to our condensed consolidated financial statements.
Business Environment and Trends
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 core business capabilities and offerings include research and development, feasibility and solutions development, specialized technical consulting, systems integration, engineering and design service, highly specialized mission and logistics support solutions, process technologies and solutions, program management, construction, commissioning and startup services, and asset operations and maintenance services. 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.
The global outlook for government services is favorable, with increased defense and space spending budgets driven in part by political instability, military conflicts, aging platforms and infrastructure, and the need for technology upgrades. We expect continued opportunities to provide enabling solutions and technologies to high impact, mission critical work. These opportunities continue to drive best value selections and customer confidence in the enterprise that we have built through our strategic acquisitions and organic growth. Internationally, the majority of our government services work is performed through private financed initiatives with the U.K. MoD under long-term firm contracts. These contracts are expected to provide stable, predictable earnings and cash flow over the program life, with our largest PFI extending through 2041.
We expect that a majority of the U.S. government business that we seek in the foreseeable future will be awarded through a competitive bidding process that may be impacted by delays, protests and other challenging dynamics. Additionally, our business may be affected by changes in the overall level of government spending and the alignment of our service and product offerings and capabilities with current and future budget priorities.
In the hydrocarbons sector, demand for our technologies, solutions and services is highly correlated to the level of capital and operating expenditures of our customers and prevailing market conditions. Significant volatility in commodity prices in recent years has resulted in many of our hydrocarbons customers taking steps to defer, suspend or terminate capital expenditures, resulting in delayed or reduced volumes of business across the sector. Recently, the combination of a growing global economy, technological development, and abundant sources of competitively priced feedstock are driving an increase in capital investment opportunities being evaluated and funded by our hydrocarbons customers. For example, we continue to see opportunities for midstream LNG expansion and greenfield projects to satisfy future LNG demand driven in large part by China's and Germany's environmental policies promoting a transition from coal to natural gas. Additionally, downstream projects such as petrochemicals, chemicals and fertilizers benefit from low feedstock prices and increasing global development and consumer demand. From conceptual development studies to project delivery and asset management services, we seek to collaborate with our customers to meet the demands of the growing global economy.
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Overall, we believe we have a balanced portfolio of global professional services, program delivery and technologies across the government services and hydrocarbons markets. We believe our increased mix of recurring government services and hydrocarbons services offers stability and predictability that enables us to be selective and disciplined to pursue EPC projects across hydrocarbons markets.
Three months ended June 30, 2019 compared to the three months ended June 30, 2018
The information below is an analysis of our consolidated results for the three months ended June 30, 2019. See Results of Operations by Business Segment below for additional information describing the performance of each of our reportable segments.
Revenues | Three Months Ended June 30, | |||||||||||||
2019 vs. 2018 | ||||||||||||||
Dollars in millions | 2019 | 2018 | $ | % | ||||||||||
Revenues | $ | 1,422 | $ | 1,267 | $ | 155 | 12 | % |
The increase in consolidated revenues was primarily driven by strong organic growth within our GS Logistics and Engineering businesses, additional revenue from the acquisition of SGT, and an increase in volume in our TS business segment. The increase was partially offset by decreased revenue in our ES segment due to the completion or near completion of several projects in the U.S., a decrease in revenue from services we provide to the Ichthys LNG project and the non-recurrence of the recognition of variable consideration associated with the successful completion and performance testing of an Australian LNG project in 2018. These decreases in ES EPC Delivery Projects were partially offset by growth within our ES Services and Consulting business.
Gross Profit | Three Months Ended June 30, | |||||||||||||
2019 vs. 2018 | ||||||||||||||
Dollars in millions | 2019 | 2018 | $ | % | ||||||||||
Gross profit | $ | 160 | $ | 161 | $ | (1 | ) | (1 | )% |
The decrease in gross profit was primarily caused by strong organic growth in our GS Logistics and Engineering businesses, partially offset by decreased profit in our ES business segment due to the non-recurrence of the recognition of variable consideration associated with the successful completion and performance testing of an Australian LNG project in 2018.
Equity in Earnings of Unconsolidated Affiliates | Three Months Ended June 30, | |||||||||||||
2019 vs. 2018 | ||||||||||||||
Dollars in millions | 2019 | 2018 | $ | % | ||||||||||
Equity in earnings of unconsolidated affiliates | $ | 15 | $ | 12 | $ | 3 | 25 | % |
The increase in equity in earnings of unconsolidated affiliates was primarily due to increase in earnings related to the final close-out of a U.K. joint venture in our ES business segment and higher earnings from our Aspire Defence joint venture in our GS business segment.
Selling, General and Administrative Expenses | Three Months Ended June 30, | |||||||||||||
2019 vs. 2018 | ||||||||||||||
Dollars in millions | 2019 | 2018 | $ | % | ||||||||||
Selling, general and administrative expenses | $ | (88 | ) | $ | (72 | ) | $ | 16 | 22 | % |
The increase in selling, general and administrative expenses was primarily due to the organic growth in our GS business segment. Selling, general and administrative expenses in the second quarter of 2019 and 2018 included $30 million and $21 million, respectively, related to corporate activities and $58 million and $51 million, respectively, related to the business segments.
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Interest Expense | Three Months Ended June 30, | |||||||||||||
2019 vs. 2018 | ||||||||||||||
Dollars in millions | 2019 | 2018 | $ | % | ||||||||||
Interest expense | $ | (26 | ) | $ | (17 | ) | $ | 9 | 53 | % |
The increase in interest expense was primarily due to increased borrowings and an increase in the weighted-average interest rate on our borrowings as a result of the refinancing transaction as discussed in Note 12 to our condensed consolidated financial statements.
Other Non-operating Income (Loss) | Three Months Ended June 30, | |||||||||||||
2019 vs. 2018 | ||||||||||||||
Dollars in millions | 2019 | 2018 | $ | % | ||||||||||
Other non-operating income (loss) | $ | 2 | $ | (1 | ) | $ | 3 | 300 | % |
Other non-operating income (loss) includes interest income, foreign exchange gains and losses and other non-operating income or expense items.
Provision for Income Taxes | Three Months Ended June 30, | |||||||||||||
2019 vs. 2018 | ||||||||||||||
Dollars in millions | 2019 | 2018 | $ | % | ||||||||||
Income before provision for income taxes and noncontrolling interests | $ | 68 | $ | 82 | $ | (14 | ) | (17 | )% | |||||
(Provision) for income taxes | $ | (18 | ) | $ | (18 | ) | $ | — | — | % |
Our provision for income taxes for the three months ended June 30, 2019 reflects a 27% tax rate as compared to a 22% tax rate for the three months ended June 30, 2018. See Note 13 to our condensed consolidated financial statements for discussion of our effective tax rates.
Net Income Attributable to Noncontrolling Interests | Three Months Ended June 30, | |||||||||||||
2019 vs. 2018 | ||||||||||||||
Dollars in millions | 2019 | 2018 | $ | % | ||||||||||
Net income attributable to noncontrolling interests | $ | (2 | ) | $ | (20 | ) | $ | (18 | ) | (90 | )% |
The decrease in net income attributable to noncontrolling interests was primarily due to the non-recurrence of the recognition of variable consideration associated with the successful completion and performance testing of an Australian LNG project in 2018.
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Results of Operations by Business Segment
Three Months Ended June 30, | |||||||
Dollars in millions | 2019 | 2018 | |||||
Revenues | |||||||
Government Solutions | $ | 1,033 | $ | 868 | |||
Technology Solutions | 93 | 72 | |||||
Energy Solutions | 296 | 327 | |||||
Subtotal | 1,422 | 1,267 | |||||
Non-strategic Business | — | — | |||||
Total revenues | $ | 1,422 | $ | 1,267 | |||
Gross profit | |||||||
Government Solutions | $ | 112 | $ | 85 | |||
Technology Solutions | 26 | 27 | |||||
Energy Solutions | 22 | 49 | |||||
Subtotal | 160 | 161 | |||||
Non-strategic Business | — | — | |||||
Total gross profit | $ | 160 | $ | 161 | |||
Equity in earnings of unconsolidated affiliates | |||||||
Government Solutions | $ | 8 | $ | 6 | |||
Energy Solutions | 7 | 6 | |||||
Subtotal | 15 | 12 | |||||
Non-strategic Business | — | — | |||||
Total equity in earnings of unconsolidated affiliates | $ | 15 | $ | 12 | |||
Total selling, general and administrative expenses | $ | (88 | ) | $ | (72 | ) | |
Acquisition and integration related costs | (1 | ) | (1 | ) | |||
Gain on disposition of assets | $ | 6 | $ | — | |||
Total operating income | $ | 92 | $ | 100 |
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Government Solutions
GS revenues increased by $165 million, or 19%, to $1.0 billion in the second quarter of 2019, compared to $868 million in the second quarter of 2018. This increase was primarily due to strong organic growth in our GS Logistics and Engineering businesses primarily on our AFCAP and LogCAP IV contracts, start-up of new programs in our GS Space and Mission Solutions business, as well as increased revenues due to the acquisition of SGT. See Note 4 to our condensed consolidated financial statements for more information on the the acquisition of SGT.
GS gross profit increased by $27 million, or 32%, to $112 million in the second quarter of 2019 compared to $85 million in the second quarter of 2018. This increase was primarily due to increases from the organic revenue growth in our Logistics and Engineering businesses, and additional gross profit from the acquisition of SGT.
GS equity in earnings of unconsolidated affiliates increased by $2 million, or 33%, to $8 million in the second quarter of 2019 compared to $6 million in the second quarter of 2018. This increase was primarily driven by higher earnings from our Aspire Defence Limited joint venture.
Technology Solutions
TS revenues increased by $21 million, or 29%, to $93 million in the second quarter of 2019 compared to $72 million in the second quarter of 2018, primarily due to timing of progress on proprietary equipment sales.
TS gross profit decreased by $1 million, or 4%, to $26 million in the second quarter of 2019 compared to $27 million in the second quarter of 2018 primarily due to a higher mix of proprietary equipment sales at lower margins.
Energy Solutions
ES revenues decreased by $31 million, or 9%, to $296 million in the second quarter of 2019, compared to $327 million in the second quarter of 2018. The decrease was primarily due to reduced activity on several projects nearing completion in the U.S., a decrease in revenue from services we provide to the Ichthys LNG project and the non-recurrence of the recognition of variable consideration associated with the successful completion and performance testing of an Australian LNG project in 2018. These decreases were partially offset by growth on existing operations and maintenance projects within our Services and Consulting business.
ES gross profit decreased by $27 million, or 55%, to $22 million in the second quarter of 2019, compared to $49 million in the second quarter of 2018. The decrease was primarily due to the non-recurrence of the recognition of variable consideration associated with the successful completion and performance testing of an Australian LNG project in 2018.
ES equity in earnings of unconsolidated affiliates increased by $1 million, or 17%, to $7 million in the second quarter of 2019, compared to earnings of $6 million in the second quarter of 2018. The increase is related to the final close-out of a U.K. joint venture.
Non-strategic Business
Non-strategic Business earned no revenues and no gross profit in the second quarters of 2019 and 2018. All Non-Strategic Business projects are substantially complete as of June 30, 2019. We continue to finalize project close-out activities and negotiate the settlement of claims and various other matters associated with these projects.
Changes in Estimates
Information relating to our changes in estimates is discussed in Note 2 to our condensed consolidated financial statements.
Six months ended June 30, 2019 compared to the six months ended June 30, 2018
The information below is an analysis of our consolidated results for the six months ended June 30, 2019, compared to the six months ended June 30, 2018. See Results of Operations by Business Segment below for additional information describing the performance of each of our reportable segments.
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Revenues | Six Months Ended June 30, | |||||||||||||
2019 vs. 2018 | ||||||||||||||
Dollars in millions | 2019 | 2018 | $ | % | ||||||||||
Revenues | $ | 2,762 | $ | 2,305 | $ | 457 | 20 | % |
The increase in consolidated revenues was primarily driven by strong organic growth within our GS Logistics and Engineering businesses, an additional $153 million of revenues from the acquisition of SGT in second quarter 2018 and an increase in revenue for our TS business segment. The increase was partially offset by decreased revenue in our ES business segment primarily due to the completion or near completion of several projects in the U.S. and a decrease in revenue from services we provide to the Ichthys LNG project. The decrease was partially offset by growth within the Services and Consulting business within ES. See Note 9 to our condensed consolidated financial statements for more information on the Ichthys LNG project.
Gross Profit | Six Months Ended June 30, | |||||||||||||
2019 vs. 2018 | ||||||||||||||
Dollars in millions | 2019 | 2018 | $ | % | ||||||||||
Gross profit | $ | 313 | $ | 278 | $ | 35 | 13 | % |
The increase in gross profit was primarily driven by strong organic growth in our GS Logistics and Engineering businesses, additional gross profit from the acquisition of SGT, and higher revenue volume for the TS business segment. A decrease in gross profit in our ES business segment was primarily due to the non-recurrence of the recognition of variable consideration associated with the successful completion and performance testing of an Australian LNG project in 2018, partially offset by a settlement of an ammonia project in the US.
Equity in Earnings of Unconsolidated Affiliates | Six Months Ended June 30, | |||||||||||||
2019 vs. 2018 | ||||||||||||||
Dollars in millions | 2019 | 2018 | $ | % | ||||||||||
Equity in earnings of unconsolidated affiliates | $ | 15 | $ | 33 | $ | (18 | ) | (55 | )% |
The decrease in equity in earnings of unconsolidated affiliates was primarily due to a decrease in progress on our Ichthys LNG project in our ES business segment. We also recognized an impairment charge associated with an equity method investment in Latin America. See Note 9 to our condensed consolidated financial statements for more information on the Ichthys LNG project.
Selling, General and Administrative Expenses | Six Months Ended June 30, | |||||||||||||
2019 vs. 2018 | ||||||||||||||
Dollars in millions | 2019 | 2018 | $ | % | ||||||||||
Selling, general and administrative expenses | $ | (166 | ) | $ | (143 | ) | $ | 23 | 16 | % |
The increase in selling, general and administrative expenses was primarily due to the organic growth in our GS business segment. Selling, general and administrative expenses in the six months ended June 30, 2019 and 2018 included $55 million and $42 million, respectively, related to corporate activities and $111 million and $101 million, respectively, related to the business segments.
Acquisition and Integration Related Costs | Six Months Ended June 30, | |||||||||||||
2019 vs. 2018 | ||||||||||||||
Dollars in millions | 2019 | 2018 | $ | % | ||||||||||
Acquisition and integration related costs | $ | (2 | ) | $ | (4 | ) | $ | (2 | ) | (50 | )% |
The decrease in acquisition and integration related costs was primarily due to lower costs related to SGT.
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Gain on Consolidation of Aspire Entities | Six Months Ended June 30, | |||||||||||||
2019 vs. 2018 | ||||||||||||||
Dollars in millions | 2019 | 2018 | $ | % | ||||||||||
Gain on consolidation of Aspire entities | $ | — | $ | 115 | $ | (115 | ) | (100 | )% |
The gain on consolidation of Aspire entities was recognized upon the consolidation of the Aspire Defence subcontracting entities for the six months ended June 30, 2018. See Note 4 to our condensed consolidated financial statements for additional information.
Interest Expense | Six Months Ended June 30, | |||||||||||||
2019 vs. 2018 | ||||||||||||||
Dollars in millions | 2019 | 2018 | $ | % | ||||||||||
Interest expense | $ | (51 | ) | $ | (23 | ) | $ | 28 | 122 | % |
The increase in interest expense was primarily due to increased borrowings as a result of the refinancing transaction and Convertible Notes as discussed in Note 12 to our condensed consolidated financial statements.
Other Non-operating Income (Loss) | Six Months Ended June 30, | |||||||||||||
2019 vs. 2018 | ||||||||||||||
Dollars in millions | 2019 | 2018 | $ | % | ||||||||||
Other non-operating income (loss) | $ | 7 | $ | (3 | ) | $ | 10 | 333 | % |
Other non-operating income (loss) includes interest income, foreign exchange gains and losses and other non-operating income and expense items. The increase in other non-operating income was primarily due to foreign exchange gains.
Provision for Income Taxes | Six Months Ended June 30, | |||||||||||||
2019 vs. 2018 | ||||||||||||||
Dollars in millions | 2019 | 2018 | $ | % | ||||||||||
Income before provision for income taxes and noncontrolling interests | $ | 126 | $ | 253 | $ | (127 | ) | (50 | )% | |||||
Provision for income taxes | $ | (34 | ) | $ | (52 | ) | $ | (18 | ) | (35 | )% |
Our provision for income taxes for the six months ended June 30, 2019, reflects a 27% tax rate as compared to a 20% tax rate for the six months ended June 30, 2018. The effective tax rate of 27% for the six months ended June 30, 2019 was primarily impacted by the rate differential on our foreign earnings including equity losses for which no tax benefit is available. The effective tax rate of 20% for the six months ended June 30, 2018 was impacted by a discrete tax expense as a result of obtaining control of the Aspire Defence subcontracting entities that was recorded at a lower rate than our estimated annual tax rate for 2018. See Note 13 to our condensed consolidated financial statements for further discussion on income taxes.
Net Income Attributable to Noncontrolling Interests | Six Months Ended June 30, | |||||||||||||
2019 vs. 2018 | ||||||||||||||
Dollars in millions | 2019 | 2018 | $ | % | ||||||||||
Net income attributable to noncontrolling interests | $ | (4 | ) | $ | (21 | ) | $ | (17 | ) | (81 | )% |
The decrease in net income attributable to noncontrolling interests was primarily due to the non-recurrence of the recognition of variable consideration associated with the successful completion and performance testing of an Australian LNG project in 2018.
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Results of Operations by Business Segment
Six Months Ended June 30, | |||||||
Dollars in millions | 2019 | 2018 | |||||
Revenues | |||||||
Government Solutions | $ | 2,008 | $ | 1,545 | |||
Technology Solutions | 185 | 134 | |||||
Energy Solutions | 568 | 626 | |||||
Subtotal | 2,761 | 2,305 | |||||
Non-strategic Business | 1 | — | |||||
Total revenues | $ | 2,762 | $ | 2,305 | |||
Gross profit (loss) | |||||||
Government Solutions | $ | 202 | $ | 155 | |||
Technology Solutions | 53 | 48 | |||||
Energy Solutions | 58 | 77 | |||||
Subtotal | 313 | 280 | |||||
Non-strategic Business | — | (2 | ) | ||||
Total gross profit | $ | 313 | $ | 278 | |||
Equity in earnings of unconsolidated affiliates | |||||||
Government Solutions | $ | 14 | $ | 14 | |||
Energy Solutions | 1 | 19 | |||||
Subtotal | 15 | 33 | |||||
Non-strategic Business | — | — | |||||
Total equity in earnings of unconsolidated affiliates | $ | 15 | $ | 33 | |||
Total selling, general and administrative expenses | $ | (166 | ) | $ | (143 | ) | |
Acquisition and integration related costs | $ | (2 | ) | $ | (4 | ) | |
Gain on disposition of assets | $ | 10 | $ | — | |||
Gain on consolidation of Aspire entities | $ | — | $ | 115 | |||
Total operating income | $ | 170 | $ | 279 |
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Government Solutions
GS revenues increased by $463 million, or 30%, to $2.0 billion in the six months ended June 30, 2019, compared to $1.5 billion in the six months ended June 30, 2018. This increase was primarily primarily driven by strong organic growth within our GS Logistics business primarily on our AFCAP and LogCAP IV contracts, expanded services in our Engineering business, startup of new programs in our SMS business, as well as an additional $153 million of revenues due to the acquisition of SGT in second quarter 2018. See Note 4 to our condensed consolidated financial statements for more information on the acquisition of SGT.
GS gross profit increased by $47 million, or 30%, to $202 million in the six months ended June 30, 2019, compared to $155 million in the six months ended June 30, 2018. This increase was primarily due to the strong organic growth within our GS Logistics and Engineering businesses and additional gross profit of $13 million from the acquisition of SGT.
GS equity in earnings of unconsolidated affiliates change remained flat, at $14 million in each of the six months ended June 30, 2019 and 2018.
Technology Solutions
TS revenues increased by $51 million, or 38%, to $185 million in the six months ended June 30, 2019, compared to $134 million in the six months ended June 30, 2018, primarily due to higher proprietary equipment sales.
TS gross profit increased by $5 million, or 10%, to $53 million in the six months ended June 30, 2019, compared to $48 million in the six months ended June 30, 2018, primarily driven by the increased revenue volume from proprietary equipment sales at lower margins.
Energy Solutions
ES revenues decreased by $58 million, or 9%, to $568 million in the six months ended June 30, 2019, compared to $626 million in the six months ended June 30, 2018. The decrease was primarily due to the completion or near completion of several projects in the U.S. and a decrease in revenue from services we provide to the Ichthys LNG project. The decrease was partially offset by growth within the Services and Consulting business.
ES gross profit decreased by $19 million, or 25%, to $58 million in the six months ended June 30, 2019, compared to $77 million in the six months ended June 30, 2018. This decrease was primarily due to the non-recurrence of the recognition of variable consideration associated with the successful completion and performance testing of an Australian LNG project in 2018, partially offset by a settlement of an ammonia project in the United States.
ES equity in earnings of unconsolidated affiliates decreased by $18 million, or 95%, to a $1 million in the six months ended June 30, 2019, compared to earnings of $19 million in the six months ended June 30, 2018. This decrease was primarily due to a decrease in earnings on the Ichthys LNG project as a result of the project being substantially complete. We also recognized an impairment charge associated with an equity method investment in Latin America. See Note 9 to our condensed consolidated financial statements for more information on the Ichthys LNG project.
Non-strategic Business
Non-strategic Business earned revenues of $1 million in the six months ended June 30, 2019, compared to no revenues earned in the six months ended June 30, 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 incurred no profit or loss in the six months ended June 30, 2019, compared to a gross loss of $2 million in the six months ended June 30, 2018. This change was primarily due to close-out activities on completed projects in the six months ended June 30, 2018 as we exit the business.
Changes in Estimates
Information relating to our changes in estimates is discussed in Note 2 to our condensed consolidated financial statements. See Note 9 to our condensed consolidated financial statements for more information on the Ichthys JV.
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Backlog of Unfilled Orders
Backlog generally represents the dollar amount of revenues we expect to realize in the future as a result of performing work on contracts and our pro-rata share of work to be performed by unconsolidated joint ventures. We generally include total expected revenues in backlog when a contract is awarded under a legally binding agreement. In many instances, arrangements included in backlog are complex, nonrepetitive and may fluctuate over the contract period due to the release of contracted work in phases by the customer. Additionally, nearly all contracts allow customers to terminate the agreement at any time for convenience. Where contract duration is indefinite and clients can terminate for convenience without compensating us for periods beyond the date of termination, backlog is limited to the estimated amount of expected revenues within the following twelve months. Certain contracts provide maximum dollar limits, with actual authorization to perform work under the contract agreed upon on a periodic basis with the customer. In these arrangements, only the amounts authorized are included in backlog. For projects where we act solely in a project management capacity, we only include the expected value of our services in backlog.
We define backlog, as it relates to U.S. government contracts, as 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. We define funded backlog as the portion of backlog for which funding currently is appropriated, less the amount of revenue we have previously recognized. We define unfunded backlog as 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.
Within our GS business segment, we calculate estimated backlog for long-term contracts associated with the U.K. government's PFIs 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.
We have included in the table below our proportionate share of unconsolidated joint ventures' estimated backlog. Since 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 $2.9 billion at June 30, 2019, and $3.0 billion at December 31, 2018. Our backlog included in the table below for projects related to consolidated joint ventures with noncontrolling interests includes 100% of the backlog associated with those joint ventures and totaled $5.1 billion and $5.3 billion at June 30, 2019 and December 31, 2018, respectively.
The following table summarizes our backlog by business segment for the periods ended June 30, 2019, and December 31, 2018, respectively:
June 30, | December 31, | ||||||
Dollars in millions | 2019 | 2018 | |||||
Government Solutions | $ | 10,689 | $ | 11,005 | |||
Technology Solutions | 500 | 594 | |||||
Energy Solutions | 2,634 | 1,896 | |||||
Subtotal | 13,823 | 13,495 | |||||
Non-strategic Business | 1 | 2 | |||||
Total backlog | $ | 13,824 | $ | 13,497 |
We estimate that as of June 30, 2019, 32% of our backlog will be executed within one year. Of this amount, 85% will be recognized in revenues on our condensed consolidated statement of operations and 15% will be recorded by our unconsolidated joint ventures. As of June 30, 2019, $154 million of our backlog relates to active contracts that are in a loss position.
As of June 30, 2019, 10% of our backlog was attributable to fixed-price contracts, 53% was attributable to PFIs and 37% of our backlog was attributable to cost-reimbursable contracts. For contracts that contain both fixed-price and cost-reimbursable components, we classify the individual components as either fixed-price or cost-reimbursable according to the composition of the contract; however, for smaller contracts, we characterize the entire contract based on the predominant component. As of June 30, 2019, $9.3 billion of our GS backlog was currently funded by our customers.
As of June 30, 2019, we had approximately $3.3 billion of priced option periods for U.S. government contracts that are not included in the backlog amounts presented above.
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The difference between backlog of $13.8 billion and the remaining performance obligation as defined by ASC 606 of $10.3 billion is primarily due to our proportionate share of backlog related to unconsolidated joint ventures which is not included in our remaining performance obligation. See Note 3 to our condensed consolidated financial statements for discussion of the remaining performance obligation.
Transactions with Joint Ventures
We perform many of our projects through incorporated and unincorporated joint ventures. 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. We recognize the profit on our services provided to joint ventures that we consolidate and joint ventures that we record under the equity method of accounting primarily using the percentage-of-completion method. See Note 10 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information. The information discussed therein is incorporated by reference into this Part I, Item 2.
Legal Proceedings
Information relating to various commitments and contingencies is described in Notes 14 and 15 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the information discussed therein is incorporated by reference into this Part I, Item 2.
Liquidity and Capital Resources
ES services projects generally 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 will be issued under our $500 million PLOC or our $500 million Revolver under the Senior Credit Facility. Letters of credit may also be arranged with our banks on a bilateral, syndicated or other basis. We believe we have adequate letter of credit capacity under the Senior Credit Facility and bilateral lines, as well as adequate surety bond capacity under our existing lines to support our operations, and backlog for the next 12 months.
Cash generated from operations and the Senior Credit Facility are our primary sources of liquidity. Our operating cash flow can vary significantly from year to year and is affected by the mix, terms, timing and percentage of completion of our hydrocarbons services projects. Certain projects may receive cash in the early phases of our larger hydrocarbons services fixed-price projects, technology projects, and those of our consolidated joint ventures in advance of incurring related costs. On reimbursable contracts, we may utilize cash on hand or availability under the Senior Credit Facility to satisfy any periodic operating cash requirements for working capital, as we frequently incur costs and subsequently invoice our customers. We believe that existing cash balances, internally generated cash flows and availability under the Senior Credit Facility are sufficient to support our day-to-day domestic and foreign business operations for at least the next 12 months.
Cash and equivalents totaled $611 million at June 30, 2019, and $739 million at December 31, 2018 and consisted of the following:
June 30, | December 31, | ||||||
Dollars in millions | 2019 | 2018 | |||||
Domestic U.S. cash | $ | 125 | $ | 211 | |||
International cash | 182 | 210 | |||||
Joint venture and Aspire project cash | 304 | 318 | |||||
Total | $ | 611 | $ | 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.
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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 underfunded 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. In assessing the amount of cash to be repatriated, 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, among other things. As of June 30, 2019, we have not changed our indefinite reinvestment decision on our undistributed earnings of our foreign subsidiaries.
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 including us. We expect that the majority of the joint venture cash balances will be utilized for the corresponding joint venture projects.
As of June 30, 2019, substantially all of our excess cash was held in commercial bank time deposits or interest bearing short-term investment accounts with the primary objectives of preserving capital and maintaining liquidity.
Cash Flows
Cash flows activities summary | |||||||
Six Months Ended June 30, | |||||||
Dollars in millions | 2019 | 2018 | |||||
Cash flows provided by (used in) operating activities | $ | 81 | $ | (36 | ) | ||
Cash flows (used in) investing activities | (131 | ) | (332 | ) | |||
Cash flows (used in) provided by financing activities | (78 | ) | 472 | ||||
Effect of exchange rate changes on cash | — | (24 | ) | ||||
(Decrease) increase in cash and equivalents | $ | (128 | ) | $ | 80 |
Operating Activities. 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 hydrocarbon services 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 reimbursable versus fixed price projects, and as a result, fluctuations in these components are not uncommon in our business.
Cash provided by operations totaled $81 million in the first six months of 2019 as compared to net income of $92 million. The difference primarily results from net unfavorable changes in working capital balances for projects as discussed below:
• | The $118 million unfavorable cash flow impact related to accounts receivable was primarily related to increases in accounts receivable in our GS and ES business segments. |
• | The $67 million favorable cash flow impact related to accounts payable was largely attributable to growth in our TS and GS business segments. |
• | In addition, we received distributions of earnings from our unconsolidated affiliates of $45 million and contributed $19 million to our pension funds in the first six months of 2019. |
Cash used in operations totaled $36 million in the first six months of 2018 primarily resulting from net unfavorable changes of $130 million in working capital balances for projects as discussed below:
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• | Accounts receivable unfavorable cash flow impact 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, partially offset by strong collections in our TS segment. |
• | Contract assets unfavorable cash flow impact in the first six months in 2018 was primarily due to increases in contract assets related to a downstream EPC project in the U.S. and in various other U.S. government projects. |
• | Accounts payable favorable cash flow impact in the first six months in 2018 was primarily related to an increase in accounts payable related to our consolidated Aspire Defence subcontracting entities, since the date we obtained control and growth in our business on various other U.S. government projects. This increase was partially offset by decreases in accounts payable related to our ES and TS business segments. |
• | Contract liabilities unfavorable cash flow impact in the first six months in 2018 was primarily related to funding of projects in Australia within our ES business segment, partially offset with various projects in our GS business segment. |
• | We received distributions of earnings from our unconsolidated affiliates of $9 million and contributed $19 million to our pension funds in the first six months in 2018. |
Investing Activities. Cash used in investing activities totaled $131 million in the first six months of 2019 and was primarily due to investment in JKC. See Note 9 to our condensed consolidated financial statements for discussion of the Ichthys Project and our investment contributions to JKC.
Cash used in investing activities totaled $332 million in the first six months of 2018 and was primarily due to the acquisition of SGT and investment contributions to JKC, partially offset by the incremental cash resulting from the consolidation of the Aspire Defence subcontracting entities.
Financing Activities. Cash used in financing activities totaled $78 million in the first six months of 2019 and was primarily due to $47 million in payments on borrowings and $23 million for dividend payments to common shareholders.
Cash provided by financing activities totaled $472 million in the first six months of 2018 and primarily includes $959 million in borrowings on Term Loans A and B, $250 million in borrowings from the Revolver, offset by $605 million of payments on borrowings, $46 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 of our joint ventures, and $23 million for dividend payments to common shareholders.
Future sources of cash. We believe that future sources of cash include cash flows from operations, cash derived from working capital management, and cash borrowings under the Senior Credit Facility.
Future uses of cash. We believe that future uses of cash include working capital requirements, funding of recognized project losses, 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 operating leases and various other obligations, including potential litigation payments, as they arise.
Other factors potentially affecting liquidity
Ichthys LNG Project. As discussed in Note 9 to our condensed consolidated financial statements, JKC has included in its project estimates-at-completion significant revenues associated with unapproved change orders and claims against the client as well as estimated recoveries of claims against suppliers and subcontractors. The client reserved their contractual rights on certain amounts previously funded to JKC and is currently seeking recoveries of those amounts. JKC continues to incur certain ongoing site services and close-out costs which it believes are reimbursable under the terms of the Ichthys LNG contract for which the client continues to withhold payment. We have funded and expect to continue funding JKC for our proportionate share of the capital requirements in the future until these matters are resolved.
In addition, JKC is incurring substantial costs to complete the Power Plant under the fixed price portion of the Ichthys LNG contract. JKC believes these costs are recoverable from the Consortium who abandoned their contractual obligation to complete the Power Plant as the original subcontractor. We have initiated arbitrations and other legal proceedings to recover these costs
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which may take several years to resolve. As a result, we have funded and expect to continue funding JKC for our proportionate share of the capital requirements to complete the Power Plant as these legal proceedings progress.
During the six months ended June 30, 2019, we made investment contributions to JKC of approximately $126 million to fund our proportionate share of the ongoing project execution activities. During 2018, we made investment contributions to JKC of approximately $344 million to fund our proportionate share of the ongoing project execution activities. Our projected total investment contributions to complete the project is approximately $500 million through the end of 2019 thus leaving an estimated $30 million to be funded through the end of the project. JKC's obligations to the client are guaranteed on a joint and several basis by the joint venture partners. To the extent our joint venture partners are unable to complete their obligations, we may be required to fund incremental amounts above our 30% ownership interest. Negotiations and legal proceedings with the client and the subcontractors are ongoing, the goal of which is to minimize these expected outflows.
As of June 30, 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 recognized on our balance sheet a funding deficit of $219 million (measured as the difference between the fair value of plan assets and the projected benefit obligation) for our frozen defined benefit pension plans. The total amount of employer pension contributions paid for the six months ended June 30, 2019 was $19 million and primarily related to our defined benefit plan in the U.K. The funding requirements for our U.K. pension plan are determined based on the U.K. Pensions Act of 1995. Annual minimum funding requirements are based on a binding agreement with the trustees of the U.K. pension plan that is negotiated on a triennial basis. The binding agreement also includes other assurances and commitments regarding the business and assets that support the U.K. pension plan. We agreed to a new triennial agreement with the trustees of the U.K. pension in June 2019. The agreement calls for minimum annual contributions of $45 million from 2019 through the next valuation. In the future, such pension funding may increase or decrease depending on changes in the levels of interest rates, pension plan 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.
Credit Agreement and Senior Credit Facility
Information relating to our Credit Agreement and the Senior Credit Facility is described in Note 12 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the information discussed therein is incorporated by reference into this Part I, Item 2.
Convertible Senior Notes
Information relating to our Convertible Senior Notes is described in Note 12 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the information discussed therein is incorporated by reference into this Part I, Item 2.
Nonrecourse Project Debt
Information relating to our nonrecourse project debt is described in Note 12 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the information discussed therein is incorporated by reference into this Part I, Item 2.
Off-Balance Sheet Arrangements
In the ordinary course of business, we enter into various agreements providing performance guarantees to customers on behalf of certain unconsolidated and consolidated joint ventures. These agreements are entered into primarily to support the project execution commitments of these entities. Depending on the specific project joint venture, these performance guarantees have various expiration dates ranging from mechanical completion of the project being constructed to a period extending beyond contract completion in certain circumstances. 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. If costs exceed the remaining amounts payable under the contract, the company may have recourse to third parties, such as owners, joint venture partners, subcontractors or vendors for claims. In our joint venture arrangements, typically each joint venture partner indemnifies the other party for any liabilities incurred in excess of the liabilities the other party is obligated to bear under the respective joint venture
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agreement. See “Item 1A. Risk Factors” contained in Part I of our Annual Report on Form 10-K, which is incorporated herein by reference, for the year ended December 31, 2018, for information regarding our fixed-price contracts and operations through joint ventures and partnerships. Other than discussed in this report, we have not engaged in any material off-balance sheet financing arrangements through special purpose entities, and we have no material guarantees of the work or obligations of third parties.
Financial guarantees, made in the ordinary course of business in certain limited circumstances, are entered into with financial institutions and other credit grantors and generally obligate the company 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.
Letters of credit, surety bonds and guarantees. Information relating to our nonrecourse project debt is described in Note 12 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the information discussed therein is incorporated by reference into this Part I, Item 2.
Critical Accounting Policies and Estimates
There have been no material changes to our discussion of critical accounting policies and estimates from those set forth in our 2018 Annual Report on Form 10-K, which is incorporated herein by reference, for the year ended December 31, 2018.
See Note 1, Description of Company and Significant Accounting Policies, to our condensed consolidated financial statements for a discussion of the potential impact of new accounting standards on our unaudited condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Cash and equivalents are deposited with major banks throughout the world. We invest excess cash and equivalents in short-term securities, primarily time deposits and money market funds, which carry a fixed rate of return. We have not incurred any credit risk losses related to deposits of our cash and equivalents.
Foreign Currency Risk. We are exposed to market risk associated with changes in foreign currency exchange rates primarily related to engineering and construction contracts. We attempt 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 foreign exchange forward contracts and options to hedge material exposures when forecasted foreign currency revenues and costs are not denominated in the same currency and when efficient markets exist. These derivatives are generally designated as cash flow hedges and are carried at fair value. We do not enter into derivative financial instruments for trading purposes or make speculative investments in foreign currencies. We recorded a net gain of $2 million and net gain of $1 million, for the three months ended June 30, 2019 and 2018, respectively, and a net gain of $5 million and net loss of $5 million, for the six months ended June 30, 2019 and 2018, respectively, related to the impact of our hedging activities associated with our operating exposures in "Other non-operating income (expense)" on our condensed consolidated statements of operations.
We use derivative instruments, such as foreign exchange forward contracts and options, to hedge foreign currency risk related to non-functional currency assets and liabilities on our balance sheet. Each period, these balance sheet hedges are marked to market through earnings and the change in their fair value is largely offset by remeasurement of the underlying assets and liabilities. The fair value of these derivatives was not material to our condensed consolidated balance sheet for the three months ended June 30, 2019. See Note 20 to our condensed consolidated financial statements and the information discussed therein is incorporated by reference into this Item 3.
Interest Rate Risk. We are exposed to market risk for changes in interest rates for the Revolver and term loan borrowings under the Senior Credit Facility. We had no borrowings outstanding under the Revolver and $945 million under the term loan portions of the Senior Credit Facility as of June 30, 2019. Borrowings under the Senior Credit Facility bear interest at variable rates as described in Note 12 to our condensed consolidated financial statements.
We manage interest rate exposure by entering into interest rate swap agreements where we agree to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated on an agreed-upon notional principal amount. On October 10, 2018, we entered into interest rate swap agreements covering $500 million of notional value of our outstanding term loans. Under these swap agreements, we receive one month LIBOR rate and pay an average monthly fixed rate of 3.055% for the term of the swaps which expire in October 2022. The swap agreements were designated as cash flow hedges at inception in accordance with ASC Topic 815 Accounting for Derivative and Hedging Transactions. The total fair value of these derivative instruments was a liability of approximately $23 million as of June 30, 2019.
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At June 30, 2019, we had fixed rate debt aggregating $850 million and variable rate debt aggregating $445 million, after taking into account the effects of the interest rate swaps. Our weighted average interest rate for the six months ended June 30, 2019, was 5.36%. If interest rates were to increase by 50 basis points, pre-tax interest expense would increase by approximately $2 million in the next twelve months net of the impact from our swap agreements, based on outstanding borrowings as of June 30, 2019.
Item 4. Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2019, to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
During the three months ended June 30, 2019, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information relating to various commitments and contingencies is described in Notes 14 and 15 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the information discussed therein is incorporated by reference into this Part II, Item 1.
Item 1A. Risk Factors
There are no material changes from the risk factors previously disclosed in Part I, Item 1A in our Annual Report on Form 10-K, which is incorporated herein by reference, for the year ended December 31, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None.
(b) None.
(c) On February 25, 2014, our Board of Directors authorized a $350 million share repurchase program, which replaced and terminated the August 26, 2011 share repurchase program. The authorization does not specify an expiration date for the share repurchase program. The following is a summary of share repurchases of our common stock settled during the three months ended June 30, 2019.
Purchase Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Dollar Value of Maximum Number of Shares that May Yet Be Purchased Under the Plan | |||||||||
April 1 - 30, 2019 | 356 | $ | 21.51 | — | $ | 160,236,157 | |||||||
May 1 - 31, 2019 | 2,118 | $ | 22.17 | — | $ | 160,236,157 | |||||||
June 1 - 30, 2019 | 10,759 | $ | 22.66 | — | $ | 160,236,157 |
(1) | Shares repurchased include 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, Inc. 2006 Stock and Incentive Plan. Total shares acquired from employees during the three months ended June 30, 2019, was 13,233 shares at an average price of $22.55 per share. |
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Item 6. Exhibits
Exhibit Number | Description | |
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
Certification Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
Certification Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
***101.Def | Definition Linkbase Document | |
***101.Pre | Presentation Linkbase Document | |
***101.Lab | Labels Linkbase Document | |
***101.Cal | Calculation Linkbase Document | |
***101.Sch | Schema Linkbase Document | |
***101.Ins | Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
+ | Management contracts or compensatory plans or arrangements | |
* | Filed with this Form 10-Q | |
** | Furnished with this Form 10-Q | |
*** | Interactive data files |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:
KBR, INC. | ||
/s/ Mark Sopp | /s/ Raymond L. Carney | |
Mark Sopp | Raymond L. Carney | |
Executive Vice President and Chief Financial Officer | Vice President and Chief Accounting Officer |
Dated: July 31, 2019 Dated: July 31, 2019
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