KBR, INC. - Quarter Report: 2020 March (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 March 31, 2020
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: 001-33146
![kbrlogofinal2019.jpg](https://www.sec.gov/Archives/edgar/data/0001357615/000135761520000132/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) 753-2000
(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 April 22, 2020, there were 142,296,911 shares of KBR, Inc. Common Stock, par value $0.001 per share, outstanding.
TABLE OF CONTENTS
Page | |
Condensed Consolidated Balance Sheets | |
Condensed Consolidated Statements of Shareholders' Equity | |
2
Forward-Looking and Cautionary Statements
This Quarterly Report on Form 10-Q contains certain statements that are, or may be deemed to be, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, as amended. The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Some of the statements contained in this Quarterly Report on Form 10-Q are forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. The words "believe," "may," "estimate," "continue," "anticipate," "intend," "plan," "expect" and similar expressions are intended to identify forward-looking statements. Forward-looking statements include information concerning our possible or assumed future financial performance and results of operations.
We have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. While it is not possible to identify all factors, factors that could cause actual future results to differ materially include:
• | the severity and duration of world health events, including the recent outbreak of the novel coronavirus ("COVID-19") pandemic, related economic repercussions and the resulting server disruption in the oil and gas industry and negative impact on demand for oil and gas; |
• | the current significant surplus in the supply of oil and actions by the members of OPIC+ (as defined below) with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations; |
• | operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being four employees, remote work arrangements, performance of contracts and supply chain disruptions; |
• | the level of capital spending and access to capital markets by oil and gas companies, including significant recent reductions and potential additional reductions in capital expenditures by oil and gas producers in response to commodity prices and dramatically reduced demand; and |
• | potential shut-ins of production by producers due to lack of downstream demand or storage capacity. |
Many of these factors are beyond our ability to control or predict. Any of these factors, as well as the risks and uncertainties disclosed in our 2019 Annual Report on Form 10-K contained in Part I under "Risk Factors", this Quarterly Report on Form 10-Q contained in Part II under "Risk Factors", and the risk factors and other cautionary statements contained in our other filings with the SEC, or a combination of these factors, could materially and adversely affect our future financial condition or results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially and adversely from those projected in the forward-looking statements. We caution against putting undue reliance on forward-looking statements or projecting any future results based on such statements or on present or prior earnings levels. In addition, each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statement.
3
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 | |
IT | Information and Technology | |
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 | |
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 |
4
Acronym | Definition | |
SEC | U.S. Securities and Exchange Commission | |
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 |
5
PART I. FINANCIAL INFORMATION
Item 1. Financial Information
KBR, Inc.
Condensed Consolidated Statements of Operations
(In millions, except for per share data)
(Unaudited)
Three Months Ended | |||||||
March 31, | |||||||
2020 | 2019 | ||||||
Revenues | $ | 1,537 | $ | 1,340 | |||
Cost of revenues | (1,351 | ) | (1,187 | ) | |||
Gross profit | 186 | 153 | |||||
Equity in earnings of unconsolidated affiliates | 1 | — | |||||
Selling, general and administrative expenses | (97 | ) | (78 | ) | |||
Acquisition and integration related costs | — | (1 | ) | ||||
Goodwill impairment | (62 | ) | — | ||||
Restructuring charges and asset impairments | (116 | ) | — | ||||
Gain on disposition of assets and investments | 19 | 4 | |||||
Operating (loss) income | (69 | ) | 78 | ||||
Interest expense | (23 | ) | (25 | ) | |||
Other non-operating income | 7 | 5 | |||||
(Loss) income before income taxes and noncontrolling interests | (85 | ) | 58 | ||||
Benefit (provision) for income taxes | 1 | (16 | ) | ||||
Net (loss) income | (84 | ) | 42 | ||||
Net income attributable to noncontrolling interests | (20 | ) | (2 | ) | |||
Net (loss) income attributable to KBR | $ | (104 | ) | $ | 40 | ||
Net (loss) income attributable to KBR per share: | |||||||
Basic | $ | (0.73 | ) | $ | 0.28 | ||
Diluted | $ | (0.73 | ) | $ | 0.28 | ||
Basic weighted average common shares outstanding | 142 | 141 | |||||
Diluted weighted average common shares outstanding | 142 | 141 | |||||
Cash dividends declared per share | $ | 0.10 | $ | 0.08 |
See accompanying notes to condensed consolidated financial statements.
6
KBR, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In millions)
(Unaudited)
Three Months Ended | |||||||
March 31, | |||||||
2020 | 2019 | ||||||
Net (loss) income | $ | (84 | ) | $ | 42 | ||
Other comprehensive (loss) income: | |||||||
Foreign currency translation adjustments | (82 | ) | (1 | ) | |||
Pension and post-retirement benefits | 6 | 4 | |||||
Changes in fair value of derivatives | (22 | ) | (2 | ) | |||
Other comprehensive (loss) income | (98 | ) | 1 | ||||
Income tax (expense) benefit: | |||||||
Foreign currency translation adjustments | — | — | |||||
Pension and post-retirement benefits | (1 | ) | (1 | ) | |||
Changes in fair value of derivatives | 5 | — | |||||
Income tax (expense) benefit | 4 | (1 | ) | ||||
Other comprehensive (loss) income, net of tax | (94 | ) | — | ||||
Comprehensive (loss) income | (178 | ) | 42 | ||||
Less: Comprehensive income attributable to noncontrolling interests | (20 | ) | (2 | ) | |||
Comprehensive income attributable to KBR | $ | (198 | ) | $ | 40 |
See accompanying notes to condensed consolidated financial statements.
7
KBR, Inc.
Condensed Consolidated Balance Sheets
(In millions, except share data)
March 31, | December 31, | ||||||
2020 | 2019 | ||||||
(Unaudited) | |||||||
Assets | |||||||
Current assets: | |||||||
Cash and equivalents | $ | 566 | $ | 712 | |||
Accounts receivable, net of allowance for credit losses of $9 and $14 | 1,085 | 938 | |||||
Contract assets | 197 | 215 | |||||
Other current assets | 134 | 146 | |||||
Total current assets | 1,982 | 2,011 | |||||
Claims and accounts receivable | 58 | 59 | |||||
Property, plant, and equipment, net of accumulated depreciation of $388 and $386 (including net PPE of $26 and $29 owned by a variable interest entity) | 120 | 130 | |||||
Operating lease right-of-use assets | 120 | 175 | |||||
Goodwill | 1,210 | 1,265 | |||||
Intangible assets, net of accumulated amortization of $190 and $184 | 466 | 495 | |||||
Equity in and advances to unconsolidated affiliates | 759 | 850 | |||||
Deferred income taxes | 249 | 236 | |||||
Other assets | 140 | 143 | |||||
Total assets | $ | 5,104 | $ | 5,364 | |||
Liabilities and Shareholders’ Equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 693 | $ | 572 | |||
Contract liabilities | 415 | 484 | |||||
Accrued salaries, wages and benefits | 238 | 209 | |||||
Nonrecourse project debt | 11 | 11 | |||||
Operating lease liabilities | 42 | 39 | |||||
Other current liabilities | 228 | 186 | |||||
Total current liabilities | 1,627 | 1,501 | |||||
Pension obligations | 249 | 277 | |||||
Employee compensation and benefits | 97 | 115 | |||||
Income tax payable | 91 | 92 | |||||
Deferred income taxes | 14 | 16 | |||||
Nonrecourse project debt | 6 | 7 | |||||
Long-term debt | 1,053 | 1,183 | |||||
Operating lease liabilities | 145 | 192 | |||||
Other liabilities | 164 | 124 | |||||
Total liabilities | 3,446 | 3,507 | |||||
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, 178,879,099 and 178,330,201 shares issued, and 142,292,295 and 141,819,148 shares outstanding, respectively | — | — | |||||
PIC | 2,210 | 2,206 | |||||
Retained earnings | 1,320 | 1,441 | |||||
Treasury stock, 36,586,804 shares and 36,511,053 shares, at cost, respectively | (819 | ) | (817 | ) | |||
AOCL | (1,081 | ) | (987 | ) | |||
Total KBR shareholders’ equity | 1,630 | 1,843 | |||||
Noncontrolling interests | 28 | 14 | |||||
Total shareholders’ equity | 1,658 | 1,857 | |||||
Total liabilities and shareholders’ equity | $ | 5,104 | $ | 5,364 |
See accompanying notes to condensed consolidated financial statements.
8
KBR, Inc.
Condensed Consolidated Statements of Shareholders' Equity
(In millions, except for per share data)
(Unaudited)
Dollars in millions | Total | PIC | Retained Earnings | Treasury Stock | AOCL | NCI | |||||||||||||||||
Balance at December 31, 2019 | $ | 1,857 | $ | 2,206 | $ | 1,441 | $ | (817 | ) | $ | (987 | ) | $ | 14 | |||||||||
Cumulative adjustment for the adoption of ASC 326 | (3 | ) | — | (3 | ) | — | — | — | |||||||||||||||
Adjusted balance at January 1, 2020 | 1,854 | 2,206 | 1,438 | (817 | ) | (987 | ) | 14 | |||||||||||||||
Share-based compensation | 2 | 2 | — | — | — | — | |||||||||||||||||
Common stock issued upon exercise of stock options | 2 | 2 | — | — | — | — | |||||||||||||||||
Dividends declared to shareholders ($0.10/share) | (14 | ) | — | (14 | ) | — | — | — | |||||||||||||||
Repurchases of common stock | (4 | ) | — | — | (4 | ) | — | — | |||||||||||||||
Issuance of ESPP shares | 2 | — | — | 2 | — | — | |||||||||||||||||
Other noncontrolling interests activity | (6 | ) | — | — | — | — | (6 | ) | |||||||||||||||
Net loss | (84 | ) | — | (104 | ) | — | — | 20 | |||||||||||||||
Other comprehensive loss, net of tax | (94 | ) | — | — | — | (94 | ) | — | |||||||||||||||
Balance at March 31, 2020 | $ | 1,658 | $ | 2,210 | $ | 1,320 | $ | (819 | ) | $ | (1,081 | ) | $ | 28 | |||||||||
Dollars in millions | Total | PIC | Retained Earnings | Treasury Stock | AOCL | NCI | |||||||||||||||||
Balance at December 31, 2018 | $ | 1,718 | $ | 2,190 | $ | 1,235 | $ | (817 | ) | $ | (910 | ) | $ | 20 | |||||||||
Cumulative adjustment for the adoption of ASC 842 | 21 | — | 21 | — | — | — | |||||||||||||||||
Cumulative adjustment for the adoption of ASC 606 for our unconsolidated affiliates | 29 | — | 29 | — | — | — | |||||||||||||||||
Adjusted balance at January 1, 2019 | 1,768 | 2,190 | 1,285 | (817 | ) | (910 | ) | 20 | |||||||||||||||
Share-based compensation | 3 | 3 | — | — | — | — | |||||||||||||||||
Common stock issued upon exercise of stock options | 1 | 1 | — | — | — | — | |||||||||||||||||
Dividends declared to shareholders ($0.08/share) | (11 | ) | — | (11 | ) | — | — | — | |||||||||||||||
Repurchases of common stock | (3 | ) | — | — | (3 | ) | — | — | |||||||||||||||
Issuance of ESPP shares | 2 | — | — | 2 | — | — | |||||||||||||||||
Net income | 42 | — | 40 | — | — | 2 | |||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | — | — | |||||||||||||||||
Balance at March 31, 2019 | $ | 1,802 | $ | 2,194 | $ | 1,314 | $ | (818 | ) | $ | (910 | ) | $ | 22 |
See accompanying notes to condensed consolidated financial statements.
9
KBR, Inc. Condensed Consolidated Statements of Cash Flows (In millions) (Unaudited) | |||||||
Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
Cash flows from operating activities: | |||||||
Net (loss) income | $ | (84 | ) | $ | 42 | ||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||
Depreciation and amortization | 27 | 25 | |||||
Equity in earnings of unconsolidated affiliates | (1 | ) | — | ||||
Deferred income tax expense | (10 | ) | 3 | ||||
Gain on disposition of assets and investments | (19 | ) | (4 | ) | |||
Goodwill impairment | 62 | — | |||||
Asset impairments | 64 | — | |||||
Other | 1 | (4 | ) | ||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable, net of allowance for doubtful accounts | (169 | ) | (48 | ) | |||
Contract assets | 15 | (1 | ) | ||||
Accounts payable | 125 | 39 | |||||
Contract liabilities | (59 | ) | 4 | ||||
Accrued salaries, wages and benefits | 31 | 9 | |||||
Other assets and liabilities | 58 | (17 | ) | ||||
Total cash flows provided by operating activities | $ | 41 | $ | 48 | |||
Cash flows from investing activities: | |||||||
Purchases of property, plant and equipment | $ | (2 | ) | $ | (2 | ) | |
Investments in equity method joint ventures | — | (70 | ) | ||||
Acquisition of businesses, net of cash acquired | (9 | ) | — | ||||
Other | — | 3 | |||||
Total cash flows used in investing activities | $ | (11 | ) | $ | (69 | ) | |
Cash flows from financing activities: | |||||||
Borrowings on long-term debt | 113 | — | |||||
Payments on short-term and long-term borrowings | (252 | ) | (2 | ) | |||
Debt issuance costs | (3 | ) | — | ||||
Payments of dividends to shareholders | (11 | ) | (11 | ) | |||
Net proceeds from issuance of common stock | 2 | 1 | |||||
Payments to reacquire common stock | (4 | ) | (3 | ) | |||
Other | — | (2 | ) | ||||
Total cash flows used in financing activities | $ | (155 | ) | $ | (17 | ) | |
Effect of exchange rate changes on cash | (21 | ) | 7 | ||||
Decrease in cash and equivalents | (146 | ) | (31 | ) | |||
Cash and equivalents at beginning of period | 712 | 739 | |||||
Cash and equivalents at end of period | $ | 566 | $ | 708 | |||
Noncash financing activities | |||||||
Dividends declared | $ | 14 | $ | 11 |
See accompanying notes to condensed consolidated financial statements.
10
KBR, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
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 2019 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 March 31, 2020 and the results of our operations for the three months ended March 31, 2020 and 2019, and our cash flows for the three months ended March 31, 2020 and 2019.
Our significant accounting policies are detailed in "Note 1. Significant Accounting Policies" of our 2019 Annual Report on Form 10-K.
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
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of KBR, Inc. and the subsidiaries it controls, including VIEs where it is the primary beneficiary. We account for investments over which we have significant influence, but not a controlling financial interest, using the equity method of accounting. See Note 9 to our condensed consolidated financial statements for further discussion of our equity investments and VIEs. All material intercompany balances and transactions are eliminated in consolidation.
Business Reorganization and Restructuring Activities
The impact of the recent declines in oil prices, the COVID-19 pandemic and related economic, business and market disruptions is evolving rapidly and its future effects are uncertain. The actual impact of these recent developments on our business will depend on many factors, many of which are beyond management's control and knowledge. During the first quarter of 2020, our management initiated and approved a broad restructuring plan in response to the dislocation of the global energy market resulting from the recent decline in oil prices and the COVID-19 pandemic. The restructuring plan is designed to optimize costs and improve operational efficiencies. As a result of certain restructuring activities and the adverse market conditions, we also performed interim impairment tests of our goodwill, intangible assets, significant investments and various other assets resulting in impairment charges recognized for the three months ended March 31, 2020. See Note 7 "Restructuring Charges and Asset Impairments" and Note 8 "Goodwill and Goodwill Impairment" for further discussion.
The restructuring plan included the reorganization of KBR's management structure primarily within our Energy Solutions business segment. The reorganization did not have an impact on our identified reportable segments. See Note 2 to our condensed consolidated financial statements for further discussion on our segments.
Impact of Adoption of New Accounting Standards
Financial Instruments - Credit Losses
Effective January 1, 2020, we adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments, using the modified retrospective approach. This ASU replaces the incurred loss impairment model that recognizes losses when a probable threshold is met with a requirement to recognize lifetime expected credit losses immediately when a financial asset, including receivables, are recorded. The estimate of expected credit losses considers not only historical information, but also current and future economic conditions and events. As a result of the adoption, we recorded a cumulative effect adjustment to retained earnings of $3 million, net of tax of $1 million, on our opening condensed consolidated balance sheet as of January 1, 2020. See Note 19 "Financial Instruments and Risk Management" for further discussion related to credit losses.
11
Other Standards
Effective January 1, 2020, we adopted 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. The adoption of this standard did not have any impact on our financial position, results of operations or cash flows.
Effective January 1, 2020, we adopted 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. The adoption of this standard did not have any impact on our financial position, results of operations or cash flows.
Effective January 1, 2020, we adopted 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. The adoption of this standard did not have a material impact on our financial position, results of operations or cash flows.
Effective January 1, 2020, we adopted 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. The adoption of this standard did not have a material impact on our financial position, results of operations or cash flows.
Effective January 1, 2020, we adopted ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. In 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. As a result of the adoption of this standard, we used Step 1 to measure the goodwill impairment loss recognized during the first quarter of 2020 without proceeding to Step 2 of the goodwill impairment test as required under the previous standard. See Note 8 "Goodwill and Goodwill Impairment" for discussion of goodwill impairment recognized for the three months ended March 31, 2020.
Additional Balance Sheet Information
Other Current Liabilities
The components of "Other current liabilities" on our condensed consolidated balance sheets as of March 31, 2020, and December 31, 2019, are presented below:
March 31, | December 31, | ||||||
Dollars in millions | 2020 | 2019 | |||||
Current maturities of long-term debt | $ | 12 | $ | 27 | |||
Reserve for estimated losses on uncompleted contracts | 9 | 10 | |||||
Retainage payable | 46 | 41 | |||||
Income taxes payable | 26 | 25 | |||||
Restructuring reserve | 28 | — | |||||
Value-added tax payable | 34 | 36 | |||||
Dividend payable | 14 | 11 | |||||
Other miscellaneous liabilities | 59 | 36 | |||||
Total other current liabilities | $ | 228 | $ | 186 |
12
Note 2. Business Segment Information
We provide a wide range of professional services and the management of our business is heavily focused on major projects or programs within each of our reportable segments. At any given time, a relatively few number of projects, government programs and joint ventures represent a substantial part of our operations. Our reportable segments follow the same accounting policies as those described in Note 1 to our condensed consolidated financial statements.
We are organized into three core business segments, Government Solutions, Technology Solutions, and Energy Solutions and two non-core business segments as 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. KBR covers the full spectrum 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 fully integrated with our existing operations.
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 full life-cycle support solutions across the upstream, midstream and downstream hydrocarbons markets. We provide comprehensive project and program delivery capabilities as well as engineering services front-end consulting and feasibility studies, sustaining capital construction, turnarounds, maintenance services, and more. Our key capabilities leverage our operational and technical excellence as a global provider of EPC and high-impact consulting and engineering services for onshore oil and gas; LNG/GTL; oil refining; petrochemicals; chemicals; fertilizers; offshore oil and gas; and floating solutions.
Non-strategic Business. Our Non-strategic Business segment represents the operations or activities we determine are no longer core to our business strategy and that we have exited or intend to exit upon completion of existing contracts. All Non-strategic business projects are substantially complete. Current activities in this business segment primarily relate to final project close-out, negotiation and settlement of claims, joint venture liquidation and various other matters associated with these projects.
Other. Our Other segment includes corporate expenses and selling, general and administrative expenses not allocated to the business segments above.
13
Operations by Reportable Segment
Three Months Ended | |||||||
March 31, | |||||||
2020 | 2019 | ||||||
Dollars in millions | |||||||
Revenues: | |||||||
Government Solutions | $ | 955 | $ | 975 | |||
Technology Solutions | 88 | 92 | |||||
Energy Solutions | 491 | 272 | |||||
Subtotal | 1,534 | 1,339 | |||||
Non-strategic Business | 3 | 1 | |||||
Total revenues | $ | 1,537 | $ | 1,340 | |||
Gross profit (loss): | |||||||
Government Solutions | $ | 127 | $ | 90 | |||
Technology Solutions | 29 | 27 | |||||
Energy Solutions | 34 | 36 | |||||
Subtotal | 190 | 153 | |||||
Non-strategic Business | (4 | ) | — | ||||
Total gross profit | $ | 186 | $ | 153 | |||
Equity in earnings of unconsolidated affiliates | 1 | — | |||||
Selling, general and administrative expenses | (97 | ) | (78 | ) | |||
Acquisition and integration related costs | — | (1 | ) | ||||
Goodwill impairment | (62 | ) | — | ||||
Restructuring charges and asset impairments | (116 | ) | — | ||||
Gain on disposition of assets | 19 | 4 | |||||
Operating (loss) income | $ | (69 | ) | $ | 78 | ||
Interest expense | $ | (23 | ) | $ | (25 | ) | |
Other non-operating income | $ | 7 | $ | 5 | |||
(Loss) income before income taxes and noncontrolling interests | $ | (85 | ) | $ | 58 |
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 generally realize both lower and higher than expected margins on projects in any given period. We recognize revisions of revenues and costs in the period in which the revisions are known. This may result in the recognition of costs before the recognition of related revenue recovery, if any.
Energy Solutions
We recognized a favorable change of $16 million in estimated revenues and gross profit associated with variable consideration resulting from resolution of a contingency on a completed LNG project in Australia during the three months ended March 31, 2020.
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Note 3. Revenue
Disaggregated Revenue
We disaggregate our revenue from customers by 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.
Government Solutions revenue earned from key U.S. government customers including U.S. DoD agencies and NASA was $727 million and $763 million for the three months ended March 31, 2020 and 2019, respectively. Government Solutions revenue earned from non-U.S. government customers including the U.K. MoD, the Australian Defence Force and others was $228 million and $212 million for the three months ended March 31, 2020 and 2019, respectively.
Revenue by geographic destination was as follows:
Three Months Ended March 31, 2020 | |||||||||||||||||||
Total by Countries/Regions Dollars in millions | Government Solutions | Technology Solutions | Energy Solutions | Non-strategic Business | Total | ||||||||||||||
United States | $ | 513 | $ | 8 | $ | 238 | $ | 3 | $ | 762 | |||||||||
Middle East | 187 | 2 | 62 | — | 251 | ||||||||||||||
Europe | 190 | 8 | 51 | — | 249 | ||||||||||||||
Australia | 31 | — | 56 | — | 87 | ||||||||||||||
Canada | — | — | 25 | — | 25 | ||||||||||||||
Africa | 19 | 1 | 22 | — | 42 | ||||||||||||||
Asia | — | 67 | 1 | — | 68 | ||||||||||||||
Other countries | 15 | 2 | 36 | — | 53 | ||||||||||||||
Total net revenue | $ | 955 | $ | 88 | $ | 491 | $ | 3 | $ | 1,537 | |||||||||
Three Months Ended March 31, 2019 | |||||||||||||||||||
Total by Countries/Regions Dollars in millions | Government Solutions | Technology Solutions | Energy Solutions | Non-strategic Business | Total | ||||||||||||||
United States | $ | 521 | $ | 5 | $ | 101 | $ | 1 | $ | 628 | |||||||||
Middle East | 198 | 5 | 44 | — | 247 | ||||||||||||||
Europe | 199 | 14 | 41 | — | 254 | ||||||||||||||
Australia | 21 | — | 53 | — | 74 | ||||||||||||||
Canada | — | — | 2 | — | 2 | ||||||||||||||
Africa | 22 | 5 | 18 | — | 45 | ||||||||||||||
Asia | — | 61 | 2 | — | 63 | ||||||||||||||
Other countries | 14 | 2 | 11 | — | 27 | ||||||||||||||
Total net revenue | $ | 975 | $ | 92 | $ | 272 | $ | 1 | $ | 1,340 |
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Many of our contracts contain both fixed price and cost reimbursable components. We define contract type based on the component that represents the majority of the contract. Revenue by contract type was as follows:
Three Months Ended March 31, 2020 | |||||||||||||||||||
Dollars in millions | Government Solutions | Technology Solutions | Energy Solutions | Non-strategic Business | Total | ||||||||||||||
Fixed Price | $ | 288 | $ | 86 | $ | 95 | $ | — | $ | 469 | |||||||||
Cost Reimbursable | 667 | 2 | 396 | 3 | 1,068 | ||||||||||||||
Total net revenue | $ | 955 | $ | 88 | $ | 491 | $ | 3 | $ | 1,537 | |||||||||
Three Months Ended March 31, 2019 | |||||||||||||||||||
Dollars in millions | Government Solutions | Technology Solutions | Energy Solutions | Non-strategic Business | Total | ||||||||||||||
Fixed Price | $ | 272 | $ | 91 | $ | 41 | $ | 1 | $ | 405 | |||||||||
Cost Reimbursable | 703 | 1 | 231 | — | 935 | ||||||||||||||
Total net revenue | $ | 975 | $ | 92 | $ | 272 | $ | 1 | $ | 1,340 |
Remaining Performance Obligations
We recognized revenue from performance obligations satisfied in previous periods of $28 million, and $8 million for the three months ended March 31, 2020 and 2019, respectively.
On March 31, 2020, we had $11.0 billion of transaction price allocated to remaining performance obligations. We expect to recognize approximately 33% of our remaining performance obligations as revenue within one year, 35% in years two through five, and 32% thereafter. Revenue associated with our remaining performance obligations to be recognized beyond one year includes performance obligations related to the Aspire Defence and Fasttrax projects, which have contract terms extending through 2041 and 2023, respectively. The balance of remaining performance obligations does not include variable consideration that was determined to be constrained as of March 31, 2020.
Contract Assets and Contract Liabilities
We recognized revenue of $181 million for the three months ended March 31, 2020, that was previously included in the contract liability balance at December 31, 2019.
Accounts Receivable
March 31, | December 31, | ||||||
Dollars in millions | 2020 | 2019 | |||||
Unbilled | $ | 493 | $ | 308 | |||
Trade & other | 592 | 630 | |||||
Accounts receivable | $ | 1,085 | $ | 938 |
Note 4. Acquisitions
Scientific Management Associates (Operations) Pty Ltd
On March 6, 2020, we acquired certain assets and assumed certain liabilities related to the government defence business of Scientific Management Associates (Operations) Pty Ltd ("SMA"). The acquired business of SMA provides technical training services to the Royal Australian Navy and is reported within our GS business segment. We accounted for this transaction using the acquisition method under ASC 805, Business Combinations. The agreed-upon purchase price for the acquisition was $13 million, less $4 million of hold-backs to be settled and other adjustments resulting in net cash consideration paid of $9 million. We recognized goodwill of $11 million arising from the acquisition, which relates primarily to future growth opportunities to expand services provided to the Royal Australian Navy. The goodwill recognized is not deductible for tax purposes.
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Note 5. Claims and Accounts Receivable
Our claims and accounts receivable balance not expected to be collected within the next 12 months was $58 million and $59 million as of March 31, 2020 and December 31, 2019, 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 $26 million and $28 million as of March 31, 2020, and December 31, 2019, respectively, related to Form 1s issued by the U.S. government questioning or objecting to costs billed to them. See Note 13 of our condensed consolidated financial statements for additional information. The amount also includes $32 million and $31 million as of March 31, 2020 and December 31, 2019, 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 6. Unapproved Change Orders, and Claims, Against Clients and Estimated Recoveries of Claims Against Suppliers and Subcontractors
The amounts of unapproved change orders, and claims against clients and estimated recoveries of claims against suppliers and subcontractors included in determining the profit or loss on contracts are as follows:
Dollars in millions | 2020 | 2019 | |||||
Amounts included in project estimates-at-completion at January 1, | $ | 978 | $ | 973 | |||
Increase in project estimates | 2 | 11 | |||||
Approved change orders | (6 | ) | — | ||||
Foreign currency effect | (102 | ) | 5 | ||||
Amounts included in project estimates-at-completion at March 31, | $ | 872 | $ | 989 | |||
Amounts recognized over time based on progress at March 31, | $ | 872 | $ | 965 |
As of March 31, 2020 and 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 complete and all performance tests have been successfully performed. The entire facility, including two LNG liquefaction trains, cryogenic tanks and the combined cycle power generation facility, has been handed over to the client and is producing LNG. JKC is in the process of executing project close-out activities and continues to negotiate the various legal and commercial disputes with the client, suppliers and other third parties as further described below.
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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 JKC worked to resolve this dispute, the client agreed to a contractual mechanism (“Funding Deed”) in 2016 providing funding in the form of an interim contract price adjustment to JKC and consented to settlement of subcontractor claims as of that date related to the cost-reimbursable scope. While the client 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 JKC discussed above was $140 million and $158 million as of March 31, 2020 and December 31, 2019, respectively.
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 March 31, 2020. However, unlike amounts funded under the Funding Deed, there is no requirement to refund these amounts to the client by a certain date.
In October 2018, JKC received a favorable ruling from an arbitration tribunal related to the Funding Deeds. The ruling determined a contract interpretation in JKC's favor, to the effect that delay and disruption costs payable to subcontractors under the cost-reimbursable scope of the EPC contract are for the client's account and are reimbursable to JKC. JKC contends this ruling resolves the reimbursability of the subcontractor settlement sums under the Funding Deed and additional settlements made in September and October 2017. Pursuant to this decision, JKC has undertaken steps for a formal contract adjustment to the cost reimbursable scope of the contract for these settlement claims which are included in the recognized unapproved change orders as of March 31, 2020. 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.
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Combined Cycle Power Plant
Pursuant to JKC's fixed-price scope of its contract with its client, JKC awarded a fixed-price EPC contract to a subcontractor for the design, construction and commissioning of the Combined Cycle Power Plant (the "Power Plant"). The subcontractor was a consortium consisting of General Electric and GE Electrical International Inc. and a joint venture between UGL Infrastructure Pty Limited and CH2M Hill (collectively, the "Consortium"). On January 25, 2017, JKC received a Notice of Termination from the Consortium, and the Consortium ceased work on the Power Plant and abandoned the construction site. JKC believes the Consortium materially breached its subcontract and repudiated its obligation to complete the Power Plant, plus undertook actions making it more difficult and more costly for the works to be completed by others after the Consortium abandoned the site. Subsequently, the Consortium filed a request for arbitration with the ICC asserting that JKC repudiated the contract. The Consortium also sought an order that the Consortium validly terminated the subcontract. JKC has responded to this request, denying JKC committed any breach of its subcontract with the Consortium and restated its claim that the Consortium breached and repudiated its subcontract with JKC and is furthermore liable to JKC for all costs to complete the Power Plant.
In March 2017, JKC prevailed in a legal action against the Consortium requiring the return of materials, drawings and tools following their unauthorized removal from the site by the Consortium. After taking over the work, JKC discovered incomplete and defective engineering designs, defective workmanship on the site, missing, underreported and defective materials and the improper termination of key vendors/suppliers. JKC's investigations also indicate that progress of the work claimed by the Consortium was over-reported. JKC has evaluated the cost to 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.
Costs incurred to complete the Power Plant that have been determined to be probable of recovery from the Consortium under U.S. GAAP have been included as a reduction of cost in our estimate of profit at completion. The estimated recoveries exclude interest, liquidated damages and other related costs which JKC intends to pursue recovery from the Consortium. Amounts expected to be recovered from the Consortium are included in the table above.
As of March 31, 2020, JKC's claims against the Consortium were approximately $1.8 billion for recovery of JKC's costs. Hearings on the power plant arbitration are scheduled for November 2020 and March 2021 (the "Arbitration"). The previous hearing dates were vacated due to the COVID-19 outbreak. The current dates may continue to be impacted by the COVID-19 pandemic. 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 and financial position.
Ichthys Project Funding
As a result of the ongoing disputes with the client and pursuit of recoveries against the Consortium through the Arbitration, we have funded our proportionate share of the working capital requirements of JKC to complete the project. We have made investment contributions to JKC of approximately $484 million on an inception-to-date basis.
If we experience unfavorable outcomes associated with the various legal and commercial disputes, our total investment contributions could increase which could have a material adverse effect on our financial position and cash flows. Further, if our joint venture partner(s) in JKC do not fulfill their responsibilities under the JKC JV agreement or subcontract, we could be exposed to additional funding requirements as a result of the nature of the JKC JV agreement.
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As of March 31, 2020, we had $164 million in letters of credit outstanding in support of performance and warranty guarantees provided to the client. The performance and warranty letters of credit have been extended to February 2021 to allow for the various disputes to be resolved.
Other Matters
JKC is entitled to an amount of profit and overhead (“TRC Fee”) which is a fixed percentage of the target reimbursable costs ("TRC") under the reimbursable component of the contract which was to be agreed by JKC and its client. At the time of the contract, JKC and its client agreed to postpone the fixing of the TRC until after a specific milestone in the project had been achieved. Although the milestone was achieved, JKC and its client have been unable to reach agreement on the TRC. This matter was taken to arbitration in 2017. A decision was issued in December 2017 concluding that the TRC should be determined based on project estimate information available at April 2014. JKC has included an estimate for the TRC Fee in its determination of profit at completion at March 31, 2020, based on the contract provisions and the decision from the December 2017 arbitration. JKC has submitted the revised estimate of the TRC Fee to the client. The parties have not agreed to the revised estimate, and JKC has started an additional arbitration on this dispute.
In late 2019, the International Chamber of Commerce consolidated the Funding Deed arbitration, TRC arbitration and certain other claims asserted by JKC along with claims asserted by its client. A hearing date for the Funding Deed arbitration has been schedule for September 2020. The client will file a detailed statement of its claim in December 2020. The arbitration panel has been constituted but a hearing date has not been scheduled.
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 9 to our condensed consolidated financial statements for further discussion regarding our equity method investment in JKC.
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Note 7. Restructuring Charges and Asset Impairments
Restructuring Charges
During the first quarter of 2020 our management initiated and approved a broad restructuring plan in response to the recent, steep decline in oil prices which, coupled with significant adverse impacts of the COVID-19 pandemic on economic and market conditions, has resulted in dislocation of the global energy market. The restructuring plan is designed to refine our market focus, optimize costs and improve operational efficiencies. The restructuring activities and related costs approved under the plan primarily relate to rationalization of real estate and overhead across various geographies in our ES and Other segments. As part of the restructuring plan, total restructuring charges of approximately $47 million were recognized in "Restructuring charges and asset impairments" in our condensed consolidated statements of operations for the three months ended March 31, 2020 of which $23 million relates to our ES business segment and $24 million relates to our Other segment representing corporate and other overhead expenses. Total restructuring charges included severance of approximately $24 million and real estate lease abandonments of approximately $23 million associated with office facilities located in the U.S. and U.K. These lease-related restructuring charges represent accrued estimated non-lease components and other operating expenses associated with the fully abandoned office space. In estimating the fair value of the lease-related restructuring charges, we utilized a discounted cash flow model with Level 3 inputs including discount rates based on our incremental borrowing rate and other inputs including management assumptions regarding future estimated operating costs, office space utilization, and inflation over the remaining lease terms.
We expect the restructuring activities will be substantially completed in 2020. Additional restructuring activities could be identified and approved as part of the plan.
The restructuring liability at March 31, 2020 was $46 million of which $28 million is included in "Other current liabilities" and $18 million is included in "Other liabilities." A reconciliation of the beginning and ending restructuring liability balances is provided in the following table.
Dollars in millions | Severance | Lease Abandonment | Total | |||||||||
Balance as of January 1, 2020 | $ | — | $ | — | $ | — | ||||||
Restructuring charges accrued during the period | 24 | 23 | 47 | |||||||||
Cash payments / settlements during the period | (1 | ) | — | (1 | ) | |||||||
Currency translation and other adjustments | — | — | — | |||||||||
Balance as of March 31, 2020 | $ | 23 | — | $ | 23 | $ | 46 |
Asset Impairments
As a result of the significant adverse economic and market conditions associated with the dislocation of the global energy market and COVID-19 pandemic, the significant drop in the price of our common shares, and the resulting restructuring plans initiated during the first quarter of 2020, we performed interim impairment tests of our long-lived assets including goodwill, intangible assets and equity investments as well as leased right-of-use and related assets. See Note 8 "Goodwill and Goodwill Impairment" for further discussion of goodwill impairment recognized in the first quarter of 2020.
We determined the fair value of our long-lived assets based primarily on discounted cash flow analyses, and in the case of our equity investments, we also used a market earnings multiple approach. These determinations included significant management judgment, including short-term and long-term forecasts of operating performance, discount rates based on our weighted average cost of capital, revenue growth rates, profitability margins, capital expenditures, the timing of future cash flows based on an eventual recovery of the oil and gas industry, and in the case of long-lived assets, the remaining useful life and service potential of the asset. These impairment assessments incorporate inherent uncertainties, including projected commodity pricing, supply and demand for our services and future market conditions, which are difficult to predict in volatile economic environments and could result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in our forecasts.
Leased office facilities and related assets. Management's restructuring plan included the rationalization of the certain leased real estate primarily in the U.S. and U.K. As a result, we began evaluating excess office space apart from office space we will continue to utilize. We made decisions to market certain excess office space for sublease and the remaining excess office space was abandoned along with any related leasehold improvements, furniture and fixtures. The abandoned leased facilities and related assets will not provide any substantial future economic benefit and were impaired accordingly during the quarter. We recognized lease right-of-use asset impairments of approximately $28 million and impairments of leasehold improvements, furniture and
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fixtures of approximately $7 million included in "Restructuring charges and asset impairments" in our condensed consolidated statements of operations for the three months ended March 31, 2020. In determining these impairments, we utilized a discounted cash flow model with Level 3 inputs including discount rates based on our incremental borrowing rate and other inputs including management assumptions regarding future cash flows over the remaining estimated useful life of the asset, office space utilization including sublease assumptions.
Trade name intangibles. We recognized an impairment loss on indefinite-lived intangible assets of approximately $11 million associated with certain trade names acquired through previous business combinations. In connection with the energy market decline, management assessed the fair value of trade names utilized by certain operations within the ES business segment, concluded that they were substantially impaired and decided to cease use of those trade names. The trade names will provide no benefit to future periods and accordingly, the carrying values of these intangibles were impaired accordingly. In determination of this impairment, we estimated fair value using a relief-from-royalty income approach which utilized Level 3 fair value inputs including management estimates of contract performance, hypothetical royalty rates and our weighted average cost of capital.
The loss was included in "Restructuring charges and asset impairments" in our condensed consolidated statement of operations for the three months ended March 31, 2020.
Equity method investments. We evaluated significant investments and determined that two equity method investments were other-than-temporarily impaired as of March 31, 2020 including a 15% interest in a project joint venture located in the Middle East and a 50% interest in a joint venture in Latin America. We recognized total impairment losses of approximately $18 million on these investments included in "Restructuring charges and asset impairments" for the three months ended March 31, 2020, of which $13 million related to the Middle East joint venture project in our ES business segment. The fair value of this investment was determined using a blended income-based and market-based approach utilizing Level 2 fair value inputs including significant management assumptions such as projected commodity prices, operating margins, cash flows and weighted average cost of capital. We recognized an impairment loss of $5 million on the joint venture in Latin America that is reported in our Non-strategic Business segment. The impairment loss includes the write-off of a shareholder loan to the joint venture and funding of costs to dispose of the underlying joint venture assets.
The restructuring charges and impairment assessments based on fair value determinations described above incorporate inherent uncertainties, some of which are difficult to predict in volatile economic environments and could result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in our forecasts.
Note 8. Goodwill and Goodwill Impairment
In connection with our business reorganization and restructuring activities during the first quarter of 2020, we changed our internal management reporting structure which resulted in changes to the underlying reporting units within our ES business segment. Additionally, given the significant adverse economic and market conditions associated with the dislocation of the global energy market and COVID-19 pandemic as well as the significant decline in the price of our common shares during the first quarter of 2020, we performed an interim impairment test of goodwill resulting in goodwill impairment of $62 million for the three months ended March 31, 2020. The goodwill impairment was associated with a reporting unit in our ES business segment. We determined that none of the goodwill associated with reporting units in our TS and GS business segments was impaired.
For reporting units in our ES business segment, fair value was determined using an income approach utilizing discounted cash flow models with estimated cash flows based on internal forecasts of revenues and expenses over a specified period plus a terminal value. For all other reporting units, fair values were determined using a blended approach including market earnings multiples and discounted cash flow models. Under the market approach, we estimated fair value by applying earnings and revenue market multiples to a reporting unit’s operating performance for the trailing twelve-month period. The income approach estimates fair value by discounting each reporting unit’s estimated future cash flows using a weighted-average cost of capital that reflects current market conditions and the risk profile of the reporting unit. To arrive at our future cash flows, we used estimates of economic and market assumptions, including growth rates in revenues, costs, estimates of future expected changes in operating margins, tax rates and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements.
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The table below summarizes changes in the carrying amount of goodwill by business segment.
Dollars in millions | Government Solutions | Technology Solutions | Energy Solutions | Total | |||||||||||
Balance as of January 1, 2020 | $ | 978 | $ | 50 | $ | 237 | $ | 1,265 | |||||||
Goodwill acquired during the period | 11 | — | — | 11 | |||||||||||
Impairment loss | — | — | (62 | ) | (62 | ) | |||||||||
Foreign currency translation | (3 | ) | — | (1 | ) | (4 | ) | ||||||||
Balance as of March 31, 2020 | $ | 986 | $ | 50 | $ | 174 | $ | 1,210 |
Note 9. Equity Method Investments and Variable Interest Entities
We conduct some of our operations through joint ventures, which operate through partnerships, corporations and undivided interests and other business forms and are principally accounted for using the equity method of accounting. Additionally, the majority of our joint ventures are VIEs.
The following table presents a rollforward of our equity in and advances to unconsolidated affiliates:
Three Months Ended March 31, | Year Ended December 31, | ||||||
2020 | 2019 | ||||||
Dollars in millions | |||||||
Beginning balance at January 1, | $ | 850 | $ | 724 | |||
Cumulative effect of change in accounting policy (a) | — | 29 | |||||
Adjusted balance at January 1, | 850 | 753 | |||||
Equity in earnings of unconsolidated affiliates | 1 | 35 | |||||
Distributions of earnings of unconsolidated affiliates | (4 | ) | (69 | ) | |||
Payments from (advances to) unconsolidated affiliates, net | (7 | ) | (10 | ) | |||
Investments (b) | — | 146 | |||||
Impairment of equity method investments (c) | (16 | ) | — | ||||
Foreign currency translation adjustments | (61 | ) | (7 | ) | |||
Other | (4 | ) | 2 | ||||
Ending balance | $ | 759 | $ | 850 |
(a) | At January 1, 2019, we recognized a cumulative effect adjustment of $29 million as a result of the adoption of ASC 606 by our remaining unconsolidated project joint ventures. |
(b) | Investments include $141 million in funding contributions to JKC for the period ended December 31, 2019. |
(c) | During the three months ended March 31, 2020, we recognized an impairment of $13 million associated with our investment in a joint venture project located in the Middle East and a $3 million related to a joint venture in Latin America. See Note 7 "Restructuring Charges and Asset Impairments" for further discussion. |
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 March 31, 2020, 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.
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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.
March 31, 2020 | |||||||
Dollars in millions | Total Assets | Total Liabilities | |||||
Affinity joint venture (U.K. MFTS project) | $ | 12 | $ | 10 | |||
Aspire Defence Limited | $ | 62 | $ | 5 | |||
JKC joint venture (Ichthys LNG project) | $ | 489 | $ | 30 | |||
U.K. Road project joint ventures | $ | 58 | $ | 1 | |||
Middle East Petroleum Corporation (EBIC ammonia project) | $ | 33 | $ | 1 |
December 31, 2019 | |||||||
Dollars in millions | Total Assets | Total Liabilities | |||||
Affinity joint venture (U.K. MFTS project) | $ | 14 | $ | 10 | |||
Aspire Defence Limited | $ | 67 | $ | 5 | |||
JKC joint venture (Ichthys LNG project) | $ | 546 | $ | 29 | |||
U.K. Road project joint ventures | $ | 40 | $ | 21 | |||
Middle East Petroleum Corporation (EBIC ammonia project) | $ | 47 | $ | 1 |
Related Party Transactions
We often provide engineering, construction management and other subcontractor services to our unconsolidated joint ventures and our revenues include amounts related to these services. For the three months ended March 31, 2020 and 2019, our revenues included $147 million and $175 million, respectively, related to the services we provided primarily to 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 March 31, 2020, and December 31, 2019 are as follows:
March 31, | December 31, | ||||||
Dollars in millions | 2020 | 2019 | |||||
Accounts receivable, net of allowance for credit losses | $ | 53 | $ | 49 | |||
Contract assets (a) | $ | 2 | $ | 2 | |||
Contract liabilities (a) | $ | 33 | $ | 33 |
(a) | Reflects contract assets and contract liabilities primarily related to joint ventures within our ES business segment. |
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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 | March 31, 2020 | ||||||
Total Assets | Total Liabilities | ||||||
Fasttrax Limited (Fasttrax project) | $ | 46 | $ | 23 | |||
Aspire Defence subcontracting entities (Aspire Defence project) | $ | 493 | $ | 245 |
Dollars in millions | December 31, 2019 | ||||||
Total Assets | Total Liabilities | ||||||
Fasttrax Limited (Fasttrax project) | $ | 45 | $ | 24 | |||
Aspire Defence subcontracting entities (Aspire Defence project) | $ | 530 | $ | 283 |
Note 10. Retirement Benefits
The components of net periodic benefit cost related to pension benefits for the three months ended March 31, 2020 and 2019 were as follows:
Three Months Ended March 31, | |||||||||||||||
2020 | 2019 | ||||||||||||||
Dollars in millions | United States | Int’l | United States | Int’l | |||||||||||
Components of net periodic benefit cost | |||||||||||||||
Interest cost | $ | 1 | $ | 10 | $ | 1 | $ | 13 | |||||||
Expected return on plan assets | (1 | ) | (15 | ) | (1 | ) | (20 | ) | |||||||
Recognized actuarial loss | — | 6 | — | 4 | |||||||||||
Net periodic benefit cost | $ | — | $ | 1 | $ | — | $ | (3 | ) |
For the three months ended March 31, 2020, we have contributed approximately $11 million of the $46 million we expect to contribute to our plans in 2020.
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Note 11. Debt and Other Credit Facilities
Our outstanding debt consisted of the following at the dates indicated:
Dollars in millions | March 31, 2020 | December 31, 2019 | ||||||
Term Loan A | $ | 267 | $ | 176 | ||||
Term Loan B | 520 | 756 | ||||||
Convertible Notes | 350 | 350 | ||||||
Unamortized debt issuance costs - Term Loan A | (4 | ) | (4 | ) | ||||
Unamortized debt issuance costs and discount - Term Loan B | (18 | ) | (15 | ) | ||||
Unamortized debt issuance costs and discount - Convertible Notes | (50 | ) | (53 | ) | ||||
Total long-term debt | 1,065 | 1,210 | ||||||
Less: current portion | 12 | 27 | ||||||
Total long-term debt, net of current portion | $ | 1,053 | $ | 1,183 |
Senior Credit Facility
On February 7, 2020, we amended our Senior Credit Facility to, among other things, reduce the applicable margins and commitment fees associated with the various borrowings under the facility. Simultaneous with the amendment, we used proceeds from the new facility and cash on hand to refinance our outstanding borrowings resulting in an amended senior secured credit facility ("Senior Credit Facility") that consists of a $500 million revolving credit facility ("Revolver"), a $500 million PLOC, a $275 million Loan A, ("Term Loan A") and a $520 million Term Loan B ("Term Loan B"). In addition, the amendment extended the maturity dates with respect to the Revolver, PLOC and the Term Loan A to February 2025 and Term Loan B to February 2027, and amended certain other provisions including the financial covenants.
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 2.75%. 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 and PLOC.
The details of the applicable margins and commitment fees under the amended Senior Credit Facility 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 3.25 to 1.00 | 2.25 | % | 1.25 | % | 1.35 | % | 0.35 | % | ||||
Less than 3.25 to 1.00 but greater than or equal to 2.25 to 1.00 | 2.00 | % | 1.00 | % | 1.20 | % | 0.30 | % | ||||
Less than 2.25 to 1.00 but greater than or equal to 1.25 to 1.00 | 1.75 | % | 0.75 | % | 1.05 | % | 0.25 | % | ||||
Less than 1.25 to 1.00 | 1.50 | % | 0.50 | % | 0.90 | % | 0.20 | % |
The Term Loan A provides for quarterly principal payments of 0.625% of the aggregate principal amount commencing with the fiscal quarter ending June 30, 2020, increasing to 1.25% starting with the quarter ending June 30, 2022. The Term Loan B provides for quarterly principal payments of 0.25% of the initial aggregate principal amounts commencing with the fiscal quarter ending June 30, 2020.
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 4.25 to 1 through 2021, reducing to 4.00 to 1 in 2022 and 3.75 to 1 in 2023. Our consolidated interest coverage ratio as of the last day of any fiscal quarter, commencing with the fiscal quarter ending June 30, 2020 and thereafter, may not be less than 3.00 to 1. As of March 31, 2020, we were in compliance with our financial covenants.
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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.
As of March 31, 2020, the "if-converted" value of the Convertible Notes exceeded the $350 million principal amount by approximately $7 million. The net carrying value of the equity component related to the Convertible Notes was $57 million as of March 31, 2020 and December 31, 2019.
The amount of interest cost recognized relating to the contractual interest coupon was $2 million and relating to the amortization of the discount and debt issuance costs was $3 million, for the three months ended March 31, 2020 and 2019. The effective interest rate on the liability component was 6.50% for the three months ended March 31, 2020 and 2019.
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 $365 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 March 31, 2020, with respect to our $500 million Revolver, we have no outstanding revolver borrowings and have issued $25 million of letters of credit. With respect to our PLOC, we have $100 million of outstanding letters of credit. With respect to our $365 million of uncommitted lines of credit, we have utilized $196 million for letters of credit as of March 31, 2020. 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, $168 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 consolidated joint venture in which we indirectly own a 50% equity interest with an unrelated partner, was awarded a concession contract in 2001 with the U.K. MoD to provide a Heavy Equipment Transporter Service to the British Army. Fasttrax Limited operates and maintains 91 HETs for a term of 22 years. The purchase of the HETs by the joint venture was financed through two series of bonds secured by the assets of Fasttrax Limited and subordinated debt from the joint venture partners. The secured bonds are an obligation of Fasttrax Limited and are not a debt obligation of KBR as they are nonrecourse to the joint venture partners. Accordingly, in the event of a default on the notes, the lenders may only look to the assets of Fasttrax Limited for repayment.
The secured bonds were issued in two classes consisting of Class A 3.5% Index Linked Bonds in the amount of £56.0 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 12. Income Taxes
The effective tax rate was approximately 1% and 27% for the three months ended March 31, 2020 and 2019, respectively. The effective tax rate for the three months ended March 31, 2020, as compared to the U.S. statutory rate of 21%, was primarily impacted by several impairment and restructuring charges incurred. Excluding the tax impact of the impairment and restructuring charges, our tax rate would be 26% for the three months ended March 31, 2020.
Our estimated annual effective rate for 2020 is 26% excluding the effects of discrete items. Our estimated annual effective rate is subject to change based on the actual jurisdictions where our 2020 earnings are generated.
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The valuation allowance for deferred tax assets as of March 31, 2020 and December 31, 2019 was $198 million and $200 million, respectively. The changes in the valuation allowance were decreases of $2 million and $3 million for the three months ended March 31, 2020 and 2019, respectively, due to our ability to utilize additional valued foreign tax credits during these periods resulting from changes in the amount and character of forecasted income. 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 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.
Our ability to utilize the unreserved foreign tax credit carryforwards is based on our ability to generate income from foreign sources of approximately $757 million prior to their expiration whereas our ability to utilize other net deferred tax assets exclusive of those associated with indefinite-lived intangible assets is based on our ability to generate U.S. forecasted taxable income of approximately $514 million. Changes in our forecasted taxable income, in the appropriate character and source, as well as jurisdiction, could affect the ultimate realization of deferred tax assets.
The provision for uncertain tax positions included in "Other liabilities" and "Deferred income taxes" on our condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019, was $92 million and $97 million, respectively. The decrease in the reserve for uncertain tax positions primarily relates to the expiration of statute of limitations during the period ending March 31, 2020.
Note 13. U.S. Government Matters
We provide services to various U.S. governmental agencies, including the U.S. DoD, NASA, and the Department of State. We may have disagreements or experience performance issues on our U.S. government contracts. When performance issues arise under any of these contracts, the U.S. government retains the right to pursue various remedies, including challenges to expenditures, suspension of payments, fines and suspensions or debarment from future business with the U.S. government. The negotiation, administration and settlement of our contracts are subject to audit by the DCAA. The DCAA serves in an advisory role to the DCMA which is responsible for the administration of the majority of our contracts. The scope of these audits include, among other things, the validity of direct and indirect incurred costs, provisional approval of annual billing rates, approval of annual overhead rates, compliance with the FAR and CAS, compliance with certain unique contract clauses and audits of certain aspects of our internal control systems. Based on the information received to date, we do not believe any 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 closing out the LogCAP III contract since 2011, and we expect the contract closeout process to continue for at least another year. As a result of our work under LogCAP III, there are claims and disputes pending between us and the U.S. government which need to be resolved in order to close the contract. The contract closeout process includes resolving objections raised by the U.S. government through a billing dispute process referred to as Form 1s and MFRs. We continue to work with the U.S. government to resolve these issues and are engaged in efforts to reach mutually acceptable resolution of these outstanding matters. However, for certain of these matters, we have filed claims with the ASBCA or the COFC. We also have matters related to ongoing litigation or investigations involving U.S. government contracts. We anticipate billing additional labor, vendor resolution and litigation costs as we resolve the open matters in the future.
Form 1s
The U.S. government has issued and has outstanding Form 1s questioning $78 million of billed costs as of March 31, 2020. They had previously paid us $52 million of the questioned costs related to our services on the LogCAP III contract. The remaining balance of $26 million as of March 31, 2020 is included on our condensed balance sheets in “Claims and accounts receivable." In addition, we have withheld $26 million from our subcontractors at March 31, 2020 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
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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 March 31, 2020 and December 31, 2019. The balance at March 31, 2020, is recorded in "Contract liabilities" and "Other liabilities" in the amounts of $25 million and $16 million, respectively. The balance at December 31, 2019, is recorded in "Contract liabilities" and "Other liabilities" in the amounts of $26 million and $15 million, respectively.
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. As of March 31, 2020, we believe our recorded accruals and the pay-when-paid terms in our contract with FKTC are adequate if we are unable to favorably resolve our claims and disputes against the U.S. government. See "KBR Contract Claim on FKTC containers" below.
Howard qui tam. In March 2011, Geoffrey Howard and Zella Hemphill filed a complaint in the U.S. District Court for the Central District of Illinois alleging that KBR mischarged the government $628 million for unnecessary materials and equipment. In October 2014, the DOJ declined to intervene and the case was partially unsealed. Depositions of some DCMA and KBR personnel have taken place and more were expected to occur in early 2020 but have been postponed due to COVID-19. The court had initially set a deadline of July 19, 2020 as the cutoff for all fact discovery and depositions which will also be extended due to COVID-19 travel restrictions and related delays. We believe the allegations of fraud by the relators are without merit and, as of March 31, 2020, 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 for this complaint is now complete. On March 30, 2020, the Court granted KBR’s motion to transfer the case to the Southern District of Texas. As of March 31, 2020, 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 the ASBCA disallowing all of our costs paid to FKTC. KBR's motion for reconsideration by a senior panel of judges at the ASBCA was denied. KBR filed its brief on appeal in September 2019. Oral arguments are scheduled to occur on May 5, 2020. As of March 31, 2020, 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.
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Note 14. Other Commitments and Contingencies
Unaoil Investigation. The DOJ, SEC, and the SFO are conducting investigations of Unaoil, a Monaco based company, in relation to international projects involving several global companies, including KBR, whose interactions with Unaoil are a subject of those investigations. The investigations are focused on compliance with the U.S. FCPA. KBR believes it is cooperating with the DOJ, SEC, and the SFO in their investigations, including through the voluntary submission of information and responding to formal document requests.
Chadian Employee Class Action. In May 2018, former employees of our former Chadian subsidiary, Subsahara Services, Inc. (SSI), filed a class action suit claiming unpaid damages arising from the ESSO Chad Development Project for Exxon Mobil Corporation (Exxon) dating back to the early 2000s. Exxon is also named as a defendant in the case. The SSI employees previously filed two class action cases in or around 2005 and 2006 for alleged unpaid overtime and bonuses. The Chadian Labour Court ruled in favor of the SSI employees for unpaid overtime resulting in a settlement of approximately $25 million which was reimbursed by Exxon under its contract with SSI. The second case for alleged unpaid bonuses was ultimately dismissed by the Supreme Court of Chad.
The current case claims $122 million in unpaid bonuses characterized as damages rather than employee bonuses to avoid the previous Supreme Court dismissal and a 5-year statute of limitations on wage-related claims. SSI’s initial defense was filed and a hearing was held in December 2018. A merits hearing was held in February 2019. In March 2019, the Labour Court issued a decision awarding the plaintiffs approximately $34 million including a $2 million provisional award. Exxon and SSI 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 and filed briefs at a hearing on February 28, 2020. The plaintiffs failed to file a response on March 13, 2020 and a hearing was scheduled for April 17, 2020 but has been postponed indefinitely due to COVID-19 travel restrictions.
At this time we do not believe a risk of material loss is probable related to this matter, and therefore we have not accrued any loss provisions. SSI is no longer an existing entity in Chad or the United States. Further, we believe any amounts ultimately paid to the former employees related to this adverse ruling would be reimbursable by Exxon based on the applicable contract.
North West Rail Link Project. We participate in an unincorporated joint venture with two partners to provide engineering and design services in relation to the operations, trains and systems of a metro rail project in Sydney, Australia. The project commenced in 2014 and during its execution encountered delays and disputes resulting in claims and breach notices submitted to the joint venture by the client. Since November 2018, the client has submitted multiple claims alleging breach of contract and breach of duty by the joint venture in its execution of the services, claiming losses and damages of up to approximately $300 million Australian dollars. We currently believe the gross of amount of the claims significantly exceeds the client’s entitlement as well as the joint venture’s limits of liability under the contract and that the claims will be covered by project-specific professional indemnity insurance subject to deductibles.
The joint venture and its client are discussing potential resolution of the claims although no specific course of action has been agreed. In August 2019, the client advised that it has filed legal proceedings in the Supreme Court of New South Wales to preserve its position with regards to statute of limitations. The joint venture was served a notice of proceedings in November 2019 and an initial hearing was expected to occur in April 2020 but was rescheduled to August 2020. KBR has a 33% participation interest in the joint venture and the partners have joint and several liability with respect to all obligations under the contract. As of March 31, 2020, we have reserved an amount that is immaterial for this matter. However, it is reasonably possible that we may ultimately be required to pay material amounts in excess of reserves. At this time, fact discovery and expert review are in early stages. Additionally, we have not received substantiation of the client’s alleged damages and therefore, a more precise estimate cannot be made at this time.
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Note 15. 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 81% of our lease obligations at March 31, 2020. 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 three months ended March 31, 2020 and 2019 were as follows:
March 31, | March 31, | ||||||
Dollars in millions | 2020 | 2019 | |||||
Operating lease cost | $ | 13 | 14 | ||||
Short-term lease cost | 37 | 20 | |||||
Total lease cost | $ | 50 | $ | 34 |
Operating lease cost for the three months ended March 31, 2020 includes operating lease ROU asset amortization of $9 million and other noncash operating lease costs of $4 million related to the accretion of operating lease liabilities and straight-line lease accounting.
Total short-term lease commitments as of March 31, 2020 was approximately $90 million. Additional information related to leases was as follows:
March 31, | |||
Dollars in millions | 2020 | ||
Cash paid for amounts included in the measurement of lease liabilities | |||
Operating cash flows from operating leases | $ | 15 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 5 | |
Weighted-average remaining lease term-operating (in years) | 7.0 | ||
Weighted-average discount rate-operating leases | 7.4 | % |
The following is a maturity analysis of the future undiscounted cash flows associated with our operating lease liabilities as of March 31, 2020:
Year | |||||||||||||||||||||||||||
Dollars in millions | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | ||||||||||||||||||||
Future payments - operating leases | $ | 38 | $ | 42 | $ | 33 | $ | 28 | $ | 19 | $ | 86 | $ | 246 |
Dollars in millions | Operating Leases | ||
Total future payments | $ | 246 | |
Less imputed interest | (59 | ) | |
Present value of future lease payments | $ | 187 | |
Less current portion of lease obligations | (42 | ) | |
Noncurrent portion of lease obligations | $ | 145 |
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Note 16. Accumulated Other Comprehensive Loss
Changes in AOCL, net of tax, by component
Dollars in millions | Accumulated foreign currency translation adjustments | Accumulated pension liability adjustments | Changes in fair value of derivatives | Total | |||||||||||
Balance at December 31, 2019 | $ | (315 | ) | $ | (654 | ) | $ | (18 | ) | $ | (987 | ) | |||
Other comprehensive income adjustments before reclassifications | (70 | ) | — | (23 | ) | (93 | ) | ||||||||
Amounts reclassified from AOCL | (12 | ) | 5 | 6 | (1 | ) | |||||||||
Net other comprehensive income (loss) | (82 | ) | 5 | (17 | ) | (94 | ) | ||||||||
Balance at March 31, 2020 | $ | (397 | ) | $ | (649 | ) | $ | (35 | ) | $ | (1,081 | ) |
Dollars in millions | Accumulated foreign currency translation adjustments | Accumulated pension liability adjustments | Changes in fair value of derivatives | Total | |||||||||||
Balance at December 31, 2018 | $ | (304 | ) | $ | (592 | ) | $ | (14 | ) | $ | (910 | ) | |||
Other comprehensive income adjustments before reclassifications | (1 | ) | — | (3 | ) | (4 | ) | ||||||||
Amounts reclassified from AOCL | — | 3 | 1 | 4 | |||||||||||
Net other comprehensive income (loss) | (1 | ) | 3 | (2 | ) | — | |||||||||
Balance at March 31, 2019 | $ | (305 | ) | $ | (589 | ) | $ | (16 | ) | $ | (910 | ) |
Reclassifications out of AOCL, net of tax, by component
Three Months Ended March 31, | |||||||||
Dollars in millions | 2020 | 2019 | Affected line item on the Condensed Consolidated Statements of Operations | ||||||
Accumulated foreign currency adjustments | |||||||||
Reclassification of foreign currency adjustments | $ | 12 | $ | — | Net income attributable to noncontrolling interests and Gain on disposition of assets and investments | ||||
Tax benefit | — | — | Provision for income taxes | ||||||
Net accumulated foreign currency | $ | 12 | $ | — | Net of tax | ||||
Accumulated pension liability adjustments | |||||||||
Amortization of actuarial loss (a) | $ | (6 | ) | $ | (4 | ) | See (a) below | ||
Tax benefit | 1 | 1 | Provision for income taxes | ||||||
Net pension and post-retirement benefits | $ | (5 | ) | $ | (3 | ) | Net of tax | ||
Changes in fair value for derivatives | |||||||||
Foreign currency hedge and interest rate swap settlements | $ | (6 | ) | $ | (1 | ) | Other non-operating income | ||
Tax benefit | — | — | Provision for income taxes | ||||||
Net changes in fair value of derivatives | $ | (6 | ) | $ | (1 | ) | Net of tax |
(a) | This item is included in the computation of net periodic pension cost. See Note 10 to our condensed consolidated financial statements for further discussion. |
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Note 17. Share Repurchases
Authorized Share Repurchase Program
On February 25, 2014, our Board of Directors authorized a plan to repurchase up to $350 million of our outstanding shares of common stock, which replaced and terminated the August 26, 2011 share repurchase program. As of December 31, 2019, $160 million remained available under this authorization. On February 19, 2020, our Board of Directors authorized an increase of approximately $190 million of share repurchase, returning the authorization level to $350 million. The authorization does not obligate us to acquire any particular number of shares of common stock and may be commenced, suspended or discontinued without prior notice. The share repurchases are intended to be funded through our current and future cash and the authorization does not have an expiration date.
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 | ||||||||||
March 31, 2020 | ||||||||||
Number of Shares | Average Price per Share | Dollars in Millions | ||||||||
Withheld to cover shares | 149,124 | $ | 25.96 | $ | 4 | |||||
Three Months Ended | ||||||||||
March 31, 2019 | ||||||||||
Number of Shares | Average Price per Share | Dollars in Millions | ||||||||
Withheld to cover shares | 160,635 | $ | 19.77 | $ | 3 |
Note 18. Income (loss) per Share
Basic income (loss) per share is based upon the weighted average number of common shares outstanding during the period. Dilutive income (loss) 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 March 31, | |||||
Shares in millions | 2020 | 2019 | |||
Basic weighted average common shares outstanding | 142 | 141 | |||
Stock options, restricted shares, and convertible debt | — | — | |||
Diluted weighted average common shares outstanding | 142 | 141 |
For purposes of applying the two-class method in computing income (loss) per share, there was no net earnings allocated to participating securities for the three months ended March 31, 2020. Net earnings allocated to participating securities for the three months ended March 31, 2019 was $0.3 million, or a negligible amount per share. The diluted income (loss) per share calculation did not include 1.1 million and 1.7 million antidilutive weighted average shares for the three months ended March 31, 2020 and 2019.
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Note 19. Fair Value of Financial Instruments and Risk Management
Fair value measurements. The fair value of an asset or liability is the price that would be received to sell an asset or transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value and defines three levels of inputs that may be used to measure fair value. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs derived from observable market data. Level 3 inputs are unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities.
The carrying amount of cash and cash equivalents, accounts receivable and accounts payable, as reflected in the condensed consolidated balance sheets, approximates fair value due to the short-term maturities of these financial instruments. The carrying values and estimated fair values of our financial instruments that are not required to be recorded at fair value in our condensed consolidated balance sheets are provided in the following table.
March 31, 2020 | December 31, 2019 | ||||||||||||||||
Dollars in millions | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Liabilities (including current maturities): | |||||||||||||||||
Term Loan A | Level 2 | $ | 267 | $ | 267 | $ | 176 | $ | 176 | ||||||||
Term Loan B | Level 2 | 520 | 468 | 756 | 764 | ||||||||||||
Convertible notes | Level 2 | 350 | 366 | 350 | 466 | ||||||||||||
Nonrecourse project debt | Level 2 | 17 | 18 | 18 | 18 |
See Note 11 for further discussion of our term loans, convertibles notes, and nonrecourse project debt.
The following disclosures for foreign currency risk and interest rate risk includes the fair value hierarchy levels for our assets and liabilities that are measured at fair value on a recurring basis.
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.
As of March 31, 2020, the gross notional value of our foreign currency exchange forwards and option contracts used to hedge balance sheet exposures was $42 million, all of which had durations of 20 days or less. We also had approximately
$2 million (gross notional value) of cash flow hedges which had durations of 4 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 March 31, 2020, and December 31, 2019. 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.
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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 | |||||||
March 31, | |||||||
Gains (losses) dollars in millions | 2020 | 2019 | |||||
Balance Sheet Hedges - Fair Value | $ | 1 | $ | — | |||
Balance Sheet Position - Remeasurement | 6 | 3 | |||||
Net | $ | 7 | $ | 3 |
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 interest rate swaps are reported at fair value using Level 2 inputs. The fair value of the interest rate swaps at March 31, 2020, was $41 million of which $14 million is included in "Other current liabilities" and $27 million is included "Other liabilities." The unrealized net losses on these interest rate swaps was $41 million and included in "AOCL" as of March 31, 2020. The fair value of the interest rate swaps at December 31, 2019 was $21 million of which $8 million is included in "Other current liabilities" and $13 million is included in "Other liabilities." The unrealized net losses on these interest rate swaps was $21 million and included in "AOCL" as of December 31, 2019.
Credit Losses. We are exposed to credit losses primarily through our full life-cycle professional services, project delivery, and technologies offered in our ES and TS business segments. We do not consider our GS business segment to be at risk for credit losses as substantially all services within this segment are provided to the U.S., U.K. and Australian governments and related agencies. We determined our allowance for credit losses by using a loss-rate methodology, in which we assessed our historical write-off of receivables against our total receivables and contract asset balances over several years. From this historical loss-rate approach, we also considered the current and forecasted economic conditions expected to be in place over the life of our receivables and contract assets.
We monitor our ongoing credit exposure through an active review of our customers’ receivables balance against contract terms and due dates. Our activities include timely performance of our accounts receivable reconciliations, assessment of our aging of receivables, dispute resolution and payment confirmation. We will also monitor any change in our historical write-off of receivables utilized in our loss-rate methodology and assess for any forecasted change in market conditions to adjust our credit reserve.
At March 31, 2020, our ES and TS business segments that are subject to credit risk, reported approximately $566 million of financial assets consisting primarily of accounts receivable and contract assets, net of allowances of $9 million. Although there has been an economic disruption resulting from the impact of COVID-19 and the decline in oil prices during the quarter, changes in our credit loss reserve was not material for the three months ended March 31, 2020. Based on an aging analysis at March 31, 2020, 90% of our accounts receivable related to these segments were outstanding less than 90 days.
Note 20. Recent Accounting Pronouncements
New accounting pronouncements requiring implementation in future periods are discussed below.
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 post-retirement 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 March 2020, the FASB issues ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of the Interbank Offered Rate Transition on Financial Reporting to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients for contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued if certain criteria are met. Each of the expedients can be applied as of January
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1, 2020 through December 31, 2022. For eligible hedging relationships existing as of January 1, 2020 and prospectively, we are currently in the process of assessing the optional expedient allowing an entity to assume that the hedged forecasted transaction in a cash flow hedge is probable of occurring. As reference rate reform is still an ongoing process, we will continue to evaluate the timing and potential impact of adoption for other optional expedients when deemed necessary.
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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 2019 Annual Report on Form 10-K.
Overview
Our business portfolio includes full life-cycle professional services, project solutions and technologies delivered across two primary verticals, government and hydrocarbons, aligned with the following:
• | Early Project Advisory |
• | Project Definition |
• | Project Delivery |
• | Operations & Maintenance |
Our government services business is generally conducted in our GS business segment, and our hydrocarbons business is generally conducted in our TS and ES business segments.
Our capabilities and offerings include feasibility and solutions development; technical consulting; research and development; highly specialized mission support; systems acquisition, integration, engineering and design services; global logistics services; process technologies, proprietary equipment and catalysts; program management, construction, commissioning and startup services; asset operations and maintenance services; and engineering, procurement and construction services for large-scale, complex projects. We strive to deliver high quality solutions and services to support our clients' success today and to help them strengthen their strategic position for the future.
Business Environment and Trends
Industry Outlook
During these unprecedented times, as our company and the world responds to the recent outbreak of the COVID-19 pandemic, we have focused on the health, safety and wellbeing of our employees. We became aware of the potential impacts of COVID-19 on our operations prior to its spread throughout the United States in light of our operations in China and South Korea. In January 2020, we deployed our global crisis management team, which began planning for various scenarios, tested our business resilience plans and information technology infrastructure, and started transitioning our employees to telecommuting arrangements where feasible. Over 90% of our office personnel are successfully working remotely. The teamwork and agility demonstrated across the organization exemplifies the OneKBR culture.
In early February 2020, we strengthened our liquidity profile and financial platform with the successful closing of our amended credit facility, which lowered our cost of capital. As of March 31, 2020, we have no borrowings outstanding under our $500 million revolving credit facility, and based on expected free cash flow throughout the remainder of 2020, management currently has no plans to draw on this source for operating purposes. In addition, on April 15, 2020, we paid a quarterly dividend of $0.10 per share, reflecting the planned 25% increase announced earlier this year. We believe strong liquidity combined with the company’s ability to generate free cash flow in the current environment demonstrates resilience in our business.
As our employees transition to teleworking, we engaged our supply chain and instituted enhanced processes which we believe will ensure visibility of performance. The successful transition to working from home has presented us with the opportunity to accelerate our sustainability agenda and redefine how we will work in the future. The opportunity for increased flexibility as the company transitions out of the COVID-19 environment creates a safer working environment and reduces commutes for our employees, providing for a truly global workforce. We have accelerated the deployment of plans to transition our operations to a more modern and productive work environment, and as a result expect to reduce our overall real estate footprint and make more efficient use of remaining office space, which we believe will lower costs, energy usage and waste.
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Government Market Overview
In December 2019, the fiscal year 2020 U.S. defense budget was signed into law authorizing $738 billion of funding. The budget funds a national security strategy that continues the restoration of military readiness, furthers a national security strategy to confront Russia, China and other threats around the world, enhances the DoD’s cybersecurity strategy and cyber warfare capabilities, establishes the U.S. Space Force under the U.S. Air Force, and directs innovation to meet long-range emerging threats. The budget includes a number of measures to strengthen emerging technologies including cyber-science and technologies, artificial intelligence, hypersonic capabilities, and emerging biotechnologies.
Internationally, our government services work is performed primarily for the U.K. Ministry of Defence and the Australian Department of Defence. A significant majority of our work in the U.K. is contracted through long-term private financed initiatives that are expected to provide stable, predictable earnings and cash flow over the program life. Our largest PFI extends through 2041. The Australian government continues to increase defense spending, in line with its commitment to increase defense budgets to 2% of GDP by 2020-21, with particular focus on enhancing regional security, building defense capabilities and strengthening cyber defenses.
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.
With over 70% of our portfolio supporting mission critical operations for the U.S., U.K. and Australian governments, our people swiftly and deftly mobilized to ensure continuity of service amid the COVID-19 pandemic. In addition to the ongoing services provided under the company’s portfolio of long-term contracts, our GS business is directly engaged in supporting COVID-19 global response efforts, including the following:
• | Scientific and biological research to develop therapies and/or vaccines led by KBR scientists; |
• | Design, manufacture and distribution of 3-D printed masks for medical personnel and first responders; and |
• | Humanitarian and disaster relief support. |
Our GS customers across the world have been supportive and have emphasized that telecommuting flexibilities should be maximized during the COVID-19 pandemic. We have been directed, where safe and possible, to maintain normal work schedules, and the majority of our programs continue on pace with our expectations for 2020.
Hydrocarbons Market Overview
In the hydrocarbons market, 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. The COVID-19 pandemic has impacted energy demand in large part caused by a global economic contraction/recession. Production wars among the Organization of the Petroleum Exporting Countries ("OPEC") and Russia (together with OPEC and other allied producing countries, "OPEC+"), coupled with already high production in the U.S., have significantly increased supply, driving already low commodity prices even lower. This volatility in commodity prices has resulted in many energy companies taking steps to defer or suspend capital expenditures, resulting in delayed or reduced volumes of business across the sector.
We believe robust 2019 bookings and our large proportion of operations and maintenance funded services will provide stability during this period. We are monitoring capital investment and spending modifications across our client base and are proactively streamlining our ES business to reduce excess real estate capacity and overhead.
Restructuring Plan and Asset Impairments
See Note 7 "Restructuring Charges and Asset Impairments" and Note 8 "Goodwill and Goodwill Impairments" for further discussion of restructuring activities approved and initiated during the first quarter of 2020 which resulting in restructuring charges as well as impairments of various assets including goodwill, intangible assets and investments primarily associated with our ES business segment and our Other segment representing corporate and other overhead expenses.
Our Business
Overall, we believe we have a balanced portfolio of global professional services, program delivery and technologies across the government services and hydrocarbons markets. We believe our increased mix of recurring government services and
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hydrocarbons services offers stability and predictability that enables us to be highly selective and disciplined in our pursuit of EPC projects across hydrocarbons market sectors.
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 in Notes 1 and 2 to our condensed consolidated financial statements.
Three months ended March 31, 2020 compared to the three months ended March 31, 2019
The information below is an analysis of our consolidated results for the three months ended March 31, 2020, compared to the three months ended March 31, 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 March 31, | |||||||||||||
2020 vs. 2019 | ||||||||||||||
Dollars in millions | 2020 | 2019 | $ | % | ||||||||||
Revenues | $ | 1,537 | $ | 1,340 | $ | 197 | 15 | % |
The increase in consolidated revenues was primarily driven by recent awards and EPC scope ramp-up in our ES business with increased revenues of $219 million, slightly offset by decreases in our GS business due to the timing of the completion of projects and the ramp-up of recent awards, and timing of progress on several projects in our TS business.
Gross Profit | Three Months Ended March 31, | |||||||||||||
2020 vs. 2019 | ||||||||||||||
Dollars in millions | 2020 | 2019 | $ | % | ||||||||||
Gross profit | $ | 186 | $ | 153 | $ | 33 | 22 | % |
The increase in gross profit is principally driven by the GS business segment which contributed $37 million in increased gross profit primarily driven by volume growth on engineering and other projects in the U.S. and improvements in margins as the Aspire project estimates crystallize and uncertainties associated with index-based price adjustments dissipate. These increases were offset by an unfavorable mix of lower margin projects primarily in the U.S. in the ES business segment.
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Equity in Earnings of Unconsolidated Affiliates | Three Months Ended March 31, | ||||||||||||
2020 vs. 2019 | |||||||||||||
Dollars in millions | 2020 | 2019 | $ | % | |||||||||
Equity in earnings of unconsolidated affiliates | $ | 1 | $ | — | $ | 1 | n/m |
Equity earnings was favorably impacted an impairment in 2019 on an investment in a joint venture in Latin America that did not recur which was substantially offset by the completion of a North Sea oil project and a change in cost estimates on our Ichthys LNG project.
Selling, General and Administrative Expenses | Three Months Ended March 31, | |||||||||||||
2020 vs. 2019 | ||||||||||||||
Dollars in millions | 2020 | 2019 | $ | % | ||||||||||
Selling, general and administrative expenses | $ | (97 | ) | $ | (78 | ) | $ | 19 | 24 | % |
Selling, general and administrative expenses in the three months ended March 31, 2020 was $19 million higher than the same period in 2019 primarily related to organic growth within our GS business segment, and other corporate general expenses.
Acquisition and Integration Related Costs | Three Months Ended March 31, | |||||||||||||
2020 vs. 2019 | ||||||||||||||
Dollars in millions | 2020 | 2019 | $ | % | ||||||||||
Acquisition and integration related costs | $ | — | $ | (1 | ) | $ | (1 | ) | (100 | )% |
The decrease in acquisition and integration related costs was primarily due to substantial completion of acquisition and integration activities in early 2019.
Goodwill Impairment, Restructuring Charges and Asset Impairments | Three Months Ended March 31, | ||||||||||||
2020 vs. 2019 | |||||||||||||
Dollars in millions | 2020 | 2019 | $ | % | |||||||||
Goodwill impairment | $ | (62 | ) | $ | — | $ | (62 | ) | n/m | ||||
Restructuring charges and asset impairments | $ | (116 | ) | $ | — | $ | (116 | ) | n/m |
As a result of deteriorating market conditions in the energy sector, we recognized goodwill impairment of approximately $62 million associated with a reporting unit in our ES business segment during the first quarter of 2020. In response to the deteriorating market conditions, management initiated a broad restructuring plan during the first quarter of 2020. As a result of the deteriorating energy market and the restructuring plan, we also recognized recognized restructuring charges and asset impairments in the three months ended March 31, 2020 totaling $116 million. See Note 7 "Restructuring Charges and Asset Impairments" and Note 8 "Goodwill and Goodwill Impairments" in the footnotes to our accompanying condensed consolidation financial statements.
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Interest Expense | Three Months Ended March 31, | |||||||||||||
2020 vs. 2019 | ||||||||||||||
Dollars in millions | 2020 | 2019 | $ | % | ||||||||||
Interest expense | $ | (23 | ) | $ | (25 | ) | $ | (2 | ) | (8 | )% |
The decrease in interest expense was primarily due to lower outstanding borrowings and lower weighted-average interest rates on our variable-rate debt as a result of the refinancing of our credit facility in the first quarter of 2020. See Note 11 to our condensed consolidated financial statements for further discussion.
Other Non-operating Income | Three Months Ended March 31, | |||||||||||||
2020 vs. 2019 | ||||||||||||||
Dollars in millions | 2020 | 2019 | $ | % | ||||||||||
Other non-operating income | $ | 7 | $ | 5 | $ | 2 | 40 | % |
Other non-operating income primarily includes foreign exchange gains and losses. In the first quarter of 2020, we recognized net foreign currency gains of approximately $5 million consisting primarily of favorable foreign currency movements on U.S. Dollar cash positions held in Australia and certain intercompany balance positions denominated in British Pounds, Australian Dollars and Norwegian Krona.
Provision for Income Taxes | Three Months Ended March 31, | |||||||||||||
2020 vs. 2019 | ||||||||||||||
Dollars in millions | 2020 | 2019 | $ | % | ||||||||||
(Loss) income before provision for income taxes and noncontrolling interests | $ | (85 | ) | $ | 58 | $ | (143 | ) | (247 | )% | ||||
Benefit (provision) for income taxes | $ | 1 | $ | (16 | ) | $ | (17 | ) | (106 | )% |
Our provision for income taxes for the three months ended March 31, 2020, reflects a 1% tax rate as compared to a 27% tax rate for the three months ended March 31, 2019. The effective tax rate of 1% for the three months ended March 31, 2020 was primarily impacted by several impairment and restructuring charges incurred during the period. Excluding the tax impact of the impairment and restructuring charges, our tax rate would be 26% for the three months ended March 31, 2020. The effective tax rate of 27% for the three months ended March 31, 2019 was primarily impacted by the rate differential on our foreign earnings including equity losses for which no tax benefit is available. See Note 12 to our condensed consolidated financial statements for further discussion on income taxes.
Net Income Attributable to Noncontrolling Interests | Three Months Ended March 31, | ||||||||||||
2020 vs. 2019 | |||||||||||||
Dollars in millions | 2020 | 2019 | $ | % | |||||||||
Net income attributable to noncontrolling interests | $ | (20 | ) | $ | (2 | ) | $ | 18 | n/m |
The increase in net income attributable to noncontrolling interests was associated with variable consideration resulting from the resolution of a contingency on a completed LNG project and liquidation of the joint venture.
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Results of Operations by Business Segment
Three Months Ended March 31, | |||||||
Dollars in millions | 2020 | 2019 | |||||
Revenues | |||||||
Government Solutions | $ | 955 | $ | 975 | |||
Technology Solutions | 88 | 92 | |||||
Energy Solutions | 491 | 272 | |||||
Subtotal | 1,534 | 1,339 | |||||
Non-strategic Business | 3 | 1 | |||||
Total revenues | $ | 1,537 | $ | 1,340 | |||
Gross profit (loss) | |||||||
Government Solutions | $ | 127 | $ | 90 | |||
Technology Solutions | 29 | 27 | |||||
Energy Solutions | 34 | 36 | |||||
Subtotal | 190 | 153 | |||||
Non-strategic Business | (4 | ) | — | ||||
Total gross profit | $ | 186 | $ | 153 | |||
Equity in earnings of unconsolidated affiliates | |||||||
Government Solutions | $ | 5 | $ | 6 | |||
Energy Solutions | (4 | ) | 3 | ||||
Subtotal | 1 | 9 | |||||
Non-strategic Business | — | (9 | ) | ||||
Total equity in earnings of unconsolidated affiliates | $ | 1 | $ | — | |||
Total selling, general and administrative expenses | $ | (97 | ) | $ | (78 | ) | |
Acquisition and integration related costs | $ | — | $ | (1 | ) | ||
Goodwill impairment | $ | (62 | ) | $ | — | ||
Restructuring charges and asset impairments | $ | (116 | ) | $ | — | ||
Gain on disposition of assets | $ | 19 | $ | 4 | |||
Total operating income | $ | (69 | ) | $ | 78 |
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Government Solutions
GS revenues decreased by $20 million, or 2%, to $955 million in the three months ended March 31, 2020, compared to $975 million in the three months ended March 31, 2019. This decrease was primarily driven by the completion of disaster recovery services provided to the U.S. Air Force in 2019 and lower overseas contingency volume in 2020 partially offset by growth of human performance and behavioral health services provided to the U.S. Special Operations Command, increased engineering services on various other U.S. government programs, and new projects from the U.K. MoD to provide services in the Middle East.
GS gross profit increased by $37 million, or 41%, to $127 million in the three months ended March 31, 2020, compared to $90 million in the three months ended March 31, 2019. This increase was driven by a favorable project mix and an improvement in the Aspire margin as project estimates crystallize as the project progresses toward completion, volume growth on engineering services, and settlement of a legacy legal matter related under our LogCAP III contract.
GS equity in earnings of unconsolidated affiliates decreased by $1 million, or 17%, to $5 million in the three months ended March 31, 2020, compared to $6 million in the three months ended March 31, 2019. The decrease is primarily driven by lower profitability associated with the start-up of a joint venture for a U.S. government base operations support contract.
Technology Solutions
TS revenues decreased by $4 million, or 4%, to $88 million in the three months ended March 31, 2020, compared to $92 million in the three months ended March 31, 2019, primarily due to higher deliveries of proprietary equipment in the first half of 2019 that did not recur in 2020.
TS gross profit increased by $2 million, or 7%, to $29 million in the three months ended March 31, 2020, compared to $27 million in the three months ended March 31, 2019, primarily driven by a more favorable mix of license and proprietary equipment sales as compared to the prior year.
Energy Solutions
ES revenues increased by $219 million, or 81%, to $491 million in the three months ended March 31, 2020, compared to $272 million in the three months ended March 31, 2019. The increase was largely attributable to new awards and ramp-up of existing projects along the U.S. Gulf Coast. The increase also includes the impact of the close-out and a favorable adjustment to contingent consideration on an Australian LNG project.
ES gross profit decreased by $2 million, or 6%, to $34 million in the three months ended March 31, 2020, compared to $36 million in the three months ended March 31, 2019. This decrease was primarily due a higher unfavorable mix of lower margin projects primarily in the U.S as well as lower activity associated with substantial completion of construction on the Ichthys LNG project in late 2019. The decreases were partially offset by the favorable adjustment on the Australian LNG project.
ES equity in earnings of unconsolidated affiliates decreased by $7 million to $4 million in the three months ended March 31, 2020, compared to earnings of $3 million in the three months ended March 31, 2019. This decrease was primarily due to the completion of a North Sea oil project in 2019 and a change in cost estimates on our Ichthys LNG project.
Non-strategic Business
Non-strategic Business earned revenues of $3 million in the three months ended March 31, 2020, compared to $1 million earned in the March 31, 2019. Revenues in the Non-strategic Business were primarily associated with close-out activities on completed projects as we exit the business.
Non-strategic Business earned $4 million of gross profit in the three months ended March 31, 2020 primarily due to favorable benefits on the close-out of a completed project in the U.S. in the three months ended March 31, 2019.
Non-strategic Business earned no equity in earnings of unconsolidated affiliates for the three months ended March 31, 2020 compared to a loss of $9 million for the three months ended March 31, 2019 due to recognition of impairments associated with an equity method investment in Latin America in 2019.
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Changes in Estimates
Information relating to our changes in estimates is discussed in Note 2 to our condensed consolidated financial statements. See Note 6 to our condensed consolidated financial statements for more information on the Ichthys LNG project.
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. Because 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 $2.4 billion at March 31, 2020, and $2.6 billion at December 31, 2019. 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 $76 million and $78 million at March 31, 2020 and December 31, 2019, respectively.
The following table summarizes our backlog by business segment as of March 31, 2020, and December 31, 2019, respectively:
March 31, | December 31, | ||||||
Dollars in millions | 2020 | 2019 | |||||
Government Solutions | $ | 10,718 | $ | 10,960 | |||
Technology Solutions | 527 | 579 | |||||
Energy Solutions | 2,677 | 3,097 | |||||
Subtotal | 13,922 | 14,636 | |||||
Non-strategic Business | — | — | |||||
Total backlog | $ | 13,922 | $ | 14,636 |
We estimate that as of March 31, 2020, 32% of our backlog will be executed within one year. Of this amount, 89% will be recognized in revenues on our condensed consolidated statement of operations and 11% will be recorded by our unconsolidated joint ventures. As of March 31, 2020, $48 million of our backlog relates to active contracts that are in a loss position.
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As of March 31, 2020, 12% of our backlog was attributable to fixed-price contracts, 49% was attributable to PFIs and 39% 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 March 31, 2020, $8.5 billion of our GS backlog was currently funded by our customers.
As of March 31, 2020, we had approximately $2.7 billion of priced option periods for U.S. government contracts that are not included in the backlog amounts presented above.
The difference between backlog of $13.9 billion and the remaining performance obligation as defined by ASC 606 of $11.0 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 9 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 13 and 14 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
Liquidity is provided by available cash and equivalents, cash generated from operations, our Senior Credit Facility and access to financial markets. 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 projects. We often receive cash in the early phases of our larger 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 our Senior Credit Facility to satisfy any periodic operating cash requirements for working capital, as we frequently incur costs and subsequently invoice our customers.
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 our Senior Credit Facility. Letters of credit may also be arranged with our banks on a bilateral, syndicated or other basis.
As noted in Note 11 "Debt and Other Credit Facilities" in the notes to the accompanying condensed consolidated financial statements, we amended our Senior Credit Facility on February 7, 2020, reducing the applicable margins and commitment fees associated with the various borrowings under the facility. Additionally, the amendment extended maturity dates with respect to the Revolver, PLOC and Term Loan A to February 2025 and Term Loan B to February 2027. We believe that existing cash balances, internally generated cash flows, availability under our Senior Credit Facility and other lines of credit are sufficient to support our business operations for the next 12 months. As of March 31, 2020, we were in compliance with all financial covenants related to our debt agreements.
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Cash and equivalents totaled $566 million at March 31, 2020, and $712 million at December 31, 2019, and consisted of the following:
March 31, | December 31, | ||||||
Dollars in millions | 2020 | 2019 | |||||
Domestic U.S. cash | $ | 134 | $ | 207 | |||
International cash | 194 | 245 | |||||
Joint venture and Aspire project cash | 238 | 260 | |||||
Total | $ | 566 | $ | 712 |
Our cash balances are held in numerous accounts throughout the world to fund our global activities. Domestic cash relates to cash balances held by U.S. entities and is largely used to support project activities of those businesses as well as general corporate needs such as the payment of dividends to shareholders, repayment of debt and potential repurchases of our outstanding common stock.
Our international cash balances may be available for general corporate purposes but are subject to local restrictions, such as capital adequacy requirements and maintaining sufficient cash balances to support our U.K. pension plan and other obligations incurred in the normal course of business by those foreign entities. Repatriations of our undistributed foreign earnings are generally free of U.S. tax but may incur withholding and/or state taxes. We consider our future U.S. and non-U.S. cash needs such as 1) our anticipated foreign working capital requirements, including funding of our U.K. pension plan, 2) the expected growth opportunities across all geographical markets and 3) our plans to invest in strategic growth opportunities, which may include acquisitions around the world, including whether foreign earnings are permanently reinvested.
Joint venture cash and Aspire Defence project cash balances reflect the amounts held by joint venture entities that we consolidate for financial reporting purposes. These amounts are limited to those entities' activities and are not readily available for general corporate purposes; however, portions of such amounts may become available to us in the future should there be a distribution of dividends to the joint venture partners. We expect that the majority of the joint venture cash balances will be utilized for the corresponding joint venture projects.
As of March 31, 2020, 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
The following table summarizes our cash flows for the periods indicated:
Three Months Ended March 31, | |||||||
Dollars in millions | 2020 | 2019 | |||||
Cash flows provided by operating activities | $ | 41 | $ | 48 | |||
Cash flows (used in) investing activities | (11 | ) | (69 | ) | |||
Cash flows (used in) financing activities | (155 | ) | (17 | ) | |||
Effect of exchange rate changes on cash | (21 | ) | 7 | ||||
(Decrease) in cash and equivalents | $ | (146 | ) | $ | (31 | ) |
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 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.
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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 $41 million in the first three months of 2020 as compared to net loss of $84 million. After considering non-cash impacts on net income which includes restructuring charges and asset impairments, the difference primarily results from net changes in working capital balances for projects as discussed below:
• | Accounts receivable unfavorable cash flow impact of $169 million primarily related to increased billing volume due to the ramp-up of recently awarded cost-reimbursable and several new EPC projects within our ES business segment and increased billing volume on several projects in our GS business segment. |
• | Contract assets favorable cash flow impact of $15 million favorable was largely attributable to several projects in our GS business segment offset by services projects in our ES business segment |
• | Accounts payable favorable cash flow impact of $125 million largely attributable to the ramp-up of several projects in the U.S. and Middle East in our ES business segment, as well as, various projects in our TS and GS business segments. |
• | Contract liabilities unfavorable cash flow impact of $59 million was primarily due to advance billings on Aspire in our GS business segment and services projects primarily in the U.S. in our ES business segment. |
• | In addition, we received distributions of earnings from our unconsolidated affiliates of $4 million and contributed $11 million to our pension funds in the first three months of 2020. |
Investing Activities. Cash used in investing activities totaled $11 million in the first three months of 2020 and was primarily due to the acquisition of SMA. See Note 4 for further discussion on the acquisition.
Financing Activities. Cash used in financing activities totaled $155 million in the first three months of 2020 and was primarily due to $139 million in net payments on borrowings related to the refinancing of our credit facility and $11 million for dividend payments to common shareholders. See Note 11 for further discussion of our Senior Credit Facility.
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, joint venture capital calls, capital expenditures, dividends, pension funding obligations, repayments of borrowings under our Senior Credit Facility, share repurchases and strategic investments including acquisitions. Our capital expenditures will be focused primarily on facilities and equipment to support our businesses. In addition, we will use cash to make payments under leases and various other obligations, including potential litigation payments, as they arise.
Other factors potentially affecting liquidity
Ichthys LNG Project. As discussed in Note 6 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 has reserved their contractual rights on certain amounts previously funded to JKC and may seek recoveries of those amounts.
JKC incurred substantial costs to complete the power plant under the fixed-price portion of the Ichthys LNG contract. JKC believes these costs are recoverable from the Consortium who abandoned their contractual obligation to complete the power plant as the original subcontractor. We have initiated arbitrations and other legal proceedings to recover these costs which may take several years to resolve. As a result, we funded JKC our proportionate share of the capital requirements to complete the power plant as these legal proceedings progress.
We have made investment contributions to JKC of approximately $484 million to fund our proportionate share of the project execution activities on an inception-to-date basis. JKC's obligations to the client are guaranteed on a joint and several basis by the joint venture partners. Negotiations and legal proceedings with the client and the subcontractors are ongoing, the goal of which is to minimize these expected outflows. If we experience unfavorable outcomes associated with the various legal and commercial
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disputes, our total investment contributions could increase which could have a material adverse effect on our financial position and cash flows.
As of March 31, 2020, 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 $249 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 three months ended March 31, 2020 was $11 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 which is slated to commence in 2021 and is required to be completed by April 2022. The agreement calls for minimum annual contributions of £33 million ($42 million at current exchange rates) until the next valuation. In the future, pension funding may increase or decrease depending on changes in the levels of interest rates, pension plan asset return performance and other factors. A significant increase in our funding requirements for the U.K. pension plan could result in a material adverse impact on our financial position.
Credit Agreement and Senior Credit Facility
Information relating to our Senior Credit Facility is described in Note 11 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 11 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 11 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
Letters of credit, surety bonds and guarantees. In the ordinary course of business, we may enter into various arrangements providing financial or performance assurance to customers on behalf of certain consolidated and unconsolidated subsidiaries, joint ventures and other jointly executed contracts. Such off-balance sheet arrangements include letters of credit, surety bonds and corporate guarantees to support the creditworthiness or project execution commitments of these entities and typically have various expiration dates ranging from mechanical completion of the project being constructed to a period beyond completion in certain circumstances such as for warranties. We may also guarantee that a project, once completed, will achieve specified performance standards. If the project subsequently fails to meet guaranteed performance standards, we may incur additional costs, pay liquidated damages or be held responsible for the costs incurred by the client to achieve the required performance standards. The potential amount of future payments that we could be required to make under an outstanding performance arrangement is typically the remaining estimated cost of work to be performed by or on behalf of third parties. For cost reimbursable contracts, amounts that may become payable pursuant to guarantee provisions are normally recoverable from the client for work performed under the contract. For lump-sum or fixed-price contracts, the performance guarantee amount is the cost to complete the contracted work, less amounts remaining to be billed to the client under the contract. Remaining billable amounts could be greater or less than the cost to complete the project. If costs exceed the remaining amounts payable under the contract, we may have recourse to third parties, such as owners, subcontractors or vendors for claims.
In our joint venture arrangements, the liability of each partner is usually joint and several. This means that each joint venture partner may become liable for the entire risk of performance guarantees provided by each partner to the customer. Typically each joint venture partner indemnifies the other partners for any liabilities incurred in excess of the liabilities the other party is obligated to bear under the respective joint venture agreement. We are unable to estimate the maximum potential amount of future payments that we could be required to make under outstanding performance guarantees related to joint venture projects due to a number of
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factors, including but not limited to, the nature and extent of any contractual defaults by our joint venture partners, resource availability, potential performance delays caused by the defaults, the location of the projects, and the terms of the related contracts. See “Item 1A. Risk Factors” contained in Part I of our 2019 Annual Report on Form 10-K and "Item 1A. Risk Factors" contained in Part II of this Quarterly Report on Form 10-Q for information regarding our fixed-price contracts and operations through joint ventures and partnerships.
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 us to make payment in the event of a default by the borrower. These arrangements generally require the borrower to pledge collateral to support the fulfillment of the borrower’s obligation. We account for both financial and performance guarantees at fair value at issuance in accordance with ASC 460-10 Guarantees and, as of March 31, 2020, we had no material guarantees of the work or obligations of third parties recorded.
We have both committed and uncommitted lines of credit available to be used for letters of credit. Our total capacity under these committed and uncommitted lines of credit was approximately $1.4 billion of which $321 million had been utilized for outstanding letters of credit as of March 31, 2020. Information relating to our letters of credit is described in Note 11 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. Other than discussed in this Quarterly Report on Form 10-Q, we have not engaged in any material off-balance sheet financing arrangements through special purpose entities.
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 2019 Annual Report on Form 10-K, which is incorporated herein by reference, for the year ended December 31, 2019.
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 $7 million and $3 million, for the three months ended March 31, 2020 and 2019, respectively, in "Other non-operating income (expense)" on our condensed consolidated statements of operations. The net gain of $7 million in the first quarter of 2020 consisted primarily of favorable foreign currency movements on U.S. Dollar cash positions held in Australia and certain intercompany balance positions denominated in British Pounds, Australian Dollars and Norwegian Krona resulting in foreign currency gains of approximately $11 million net of $4 million related to changes in the fair value of balance sheet hedges.
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 March 31, 2020. Information relating to fair value measurements is described in Note 19 "Financial Instruments and Risk Management" to our condensed consolidated financial statements which 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 $787 million under the term loan portions of the Senior Credit Facility as of March 31, 2020. Borrowings under the Senior Credit Facility bear interest at variable rates as described in Note 11 to our condensed consolidated financial statements.
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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 $41 million as of March 31, 2020.
At March 31, 2020, we had fixed rate debt aggregating $850 million and variable rate debt aggregating $287 million, after taking into account the effects of the interest rate swaps. Our weighted average interest rate for the three months ended March 31, 2020, was 5.18%. If interest rates were to increase by 50 basis points, pre-tax interest expense would increase by approximately $1 million in the next twelve months net of the impact from our swap agreements, based on outstanding borrowings as of March 31, 2020.
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 March 31, 2020, 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 March 31, 2020, 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 13 and 14 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
We have updated certain risk factors affecting our business since those presented in our 2019 Annual Report on Form 10-K, Part I, Item 1A, for the fiscal year ended December 31, 2019. Except for the risk factors set forth below, there have been no material changes in our assessment of our risk factors from those set forth in our 2019 Annual Report on Form 10-K.
The widespread outbreak of a pandemic or epidemic, or the outbreak of an infectious disease, such as COVID-19, may materially adversely affect our business, results of operations and/or cash flows, including as a result of widespread reduced demand for oil and reduced commodity prices resulting from oversupply of oil or storage constraints.
The spread of COVID-19 across the globe has negatively affected worldwide economic and commercial activity, disrupted global supply chains, and created significant volatility and disruption of financial and commodity markets. Further, the inability of OPEC+ to agree to curtail production, combined with the oversupply of oil in light of reduced demand caused by COVID-19, has resulted in significant storage constraints, all of which cause a sharp drop in prices for oil in the first quarter of 2020. In addition, our business and operational plans may be adversely affected by the COVID-19 pandemic due to a number of factors outside of our control, including:
• | the health or availability of our workforce, including contractors and subcontractors, and restrictions that we and our customers, contractors and subcontractors impose, including limiting worksite access and facility shutdowns, to ensure the safety of employees and others; |
• | the ability or willingness of our vendors and suppliers to provide the equipment, parts or raw materials for our operations or otherwise fulfill their contractual obligations, which in turn could impair our ability to perform under our contracts or to deliver products on a timely basis; |
• | recommendations of, or restrictions imposed by, government and health authorities, including travel bans, quarantines, and shelter-in-place orders to address the COVID-19 outbreak; |
• | potential contract delays, modifications or terminations; |
• | increased potential for the occurrence of operational hazards, including terrorism, cyber-attacks or domestic vandalism, as well as information system failures or communication network disruptions; |
• | reductions in the number and amounts of new government contract awards, delays in the timing of anticipated awards or potential cancellations of such prospects as a result of the fiscal, economic and budgetary challenges facing our customers, as well as material and equipment pricing; |
• | increased cost and reduced availability of capital for growth or capital expenditures; |
• | increased costs of operation in relation to the COVID-19 outbreak, which costs may not be fully recoverable or adequately covered by insurance; and |
• | long-term disruption of the U.S. and global economy and financial and commodity markets. |
The spread of COVID-19 has caused us to significantly modify our business practices (including limiting employee and contractor presence at our work locations), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, contractors, customers, suppliers and communities. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be adversely impacted.
As the potential effects of COVID-19 are difficult to predict, the duration of any potential business disruption or the extent to which COVID-19 may negatively affect our operating results is uncertain. Any potential impact will depend on future developments and new information that may emerge regarding the spread, severity and duration of the COVID-19 pandemic and the actions taken by authorities to contain it or treat its impact, all of which are beyond our control. These potential effects, while uncertain, could adversely affect our business, financial condition, results of operations and/or cash flows, as well as our ability to pay dividends to our shareholders.
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Demand for our services and technologies depends on demand and capital spending by customers in their target markets, many of which are cyclical in nature, have been reduced in light of declining commodity prices, and which have been significantly impacted by COVID-19 and disputes among OPEC+ regarding oil prices and production levels.
Demand for many of our services in our commodity-based markets depends on capital spending by oil and natural gas companies, including national and international oil companies, and by industrial companies, which is directly affected by trends in oil, natural gas and commodities prices. Market prices for oil, natural gas and commodities have been volatile in recent years reducing the revenues and earnings of our customers. Further, in March 2020, Saudi Arabia and Russia failed to reach a decision to cut production of oil and gas along with the OPEC. Subsequently, Saudi Arabia significantly reduced the prices at which it sells oil and announced plans to increase production. These events, combined with the continued outbreak of COVID-19, contributed to a sharp drop in prices for oil in the first quarter of 2020. In April 2020, OPEC+ and the United States agreed to curtail production by approximately 10 million barrels per day, but the impact of these cuts on the market price for oil and natural gas remains uncertain. Oil prices have fallen further in recent weeks in light of widespread reduced demand as a result of COVID-19 as well as significant storage constraints. The average spot price of West Texas Intermediate (Cushing) crude oil closed at $20.51 on March 31, 2020, and subsequently declined further to below $0 during April 2020.
These market conditions make it difficult for our customers to accurately forecast and plan future business trends and activities that in turn could have a significant impact on the activity levels of our businesses. As a result, several leading international and national oil companies have announced their intention to reduce capital expenditures in 2020. Demand for LNG and other facilities for which we provide services have decreased, and could continue to decrease, in light of the sustained reduction in the price and demand for crude oil or natural gas resulting from COVID-19. Perceptions of longer-term lower oil and natural gas prices by oil and gas companies or longer-term higher material and contractor prices impacting facility costs have, and may continue to, cause our customers to reduce or defer major expenditures given the long-term nature of many large-scale projects. Even relatively minor changes in supply and demand have the potential to cause large fluctuations in the prices of oil, natural gas and commodities, as well as lead to significant market uncertainty and a variety of other factors that are beyond our control. Factors affecting the prices of oil, natural gas and other commodities include, but are not limited to:
• | world health events, including the COVID-19 pandemic, which has and may continue to reduce demand for oil and natural gas because of reduced economic activity; |
• | changes in the level of global demand for oil, natural gas, and industrial services due in part to governmental regulations, including travel bans and restrictions, quarantines, shelter in place orders, and shutdowns; |
• | worldwide or regional political, social or civil unrest, military action and economic conditions; |
• | governmental regulations or policies, including the policies of governments regarding the use of energy and the exploration for and production and development of their oil and natural gas reserves; |
• | a reduction in energy demand as a result of energy taxation or a change in consumer spending patterns; |
• | global economic growth or decline; |
• | the global level of oil and natural gas production; |
• | potential shut-ins of production by producers due to lack of downstream demand or storage capacity; |
• | global weather conditions and natural disasters; |
• | oil refining capacity; |
• | shifts in end-customer preferences toward fuel efficiency and the use of natural gas; |
• | potential acceleration of the development and expanded use of alternative fuels; |
• | environmental regulation, including limitations on fossil fuel consumption based on concerns about its relationship to climate change; and |
• | reduction in demand for the commodity-based markets in which we operate. |
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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. On February 25, 2014, our Board of Directors authorized a plan to repurchase up to $350 million of our outstanding shares of common stock, which replaced and terminated the August 26, 2011 share repurchase program. As of December 31, 2019, $160 million remained available under this authorization. On February 19, 2020, our Board of Directors authorized an increase of approximately $190 million of share repurchase, returning the authorization level to $350 million. The authorization does not obligate us to acquire any particular number of shares of common stock and may be commenced, suspended or discontinued without prior notice. The share repurchases are intended to be funded through our current and future cash and the authorization does not have an expiration date.
The following is a summary of share repurchases of our common stock settled during the three months ended March 31, 2020.
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 | |||||||||
January 1 - 31, 2020 | 938 | $ | 30.01 | — | $ | 160,236,157 | |||||||
February 1 - 29, 2020 | 52,976 | $ | 25.88 | — | $ | 350,000,000 | |||||||
March 1 - 31, 2020 | 95,210 | $ | 25.96 | — | $ | 350,000,000 |
(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 March 31, 2020, was 149,124 shares at an average price of $25.96 per share. |
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Item 6. Exhibits
Exhibit Number | Description | |
KBR Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to KBR’s current report on Form 8-K filed June 7, 2012; File No. 001-33146) | ||
Amended and Restated Bylaws of KBR, Inc. (incorporated by reference to Exhibit 3.2 to KBR’s annual report on Form 10-K for the year ended December 31, 2013 filed on February 27, 2014; File No. 001-33146) | ||
Amendment No. 2 to Credit Agreement, dated as of February 7, 2020 with Bank of America, N.A., as administrative agent, swing line lender and a letter of credit issuer, the lenders party thereto, and each of the subsidiaries of the Company party thereto (incorporated by reference to Exhibit 10.1 to KBR’s current report on Form 8-K dated February 12, 2020; File No. 001-33146) | ||
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 | ||
Form of Restricted Stock Unit Agreement (US Employee) pursuant to KBR, Inc. 2006 Stock and Incentive Plan | ||
Form of revised Restricted Stock Unit Agreement (International Employee) pursuant to KBR, Inc. 2006 Stock and Incentive Plan | ||
Form of revised Performance Stock Unit Agreement (US Employee) pursuant to KBR, Inc. 2006 Stock and Incentive Plan | ||
Form of revised Performance Stock Unit Agreement (International Employee) pursuant to KBR, Inc. 2006 Stock and Incentive Plan | ||
Form of Performance Award Agreement (US/International Employee Cash Only) pursuant to KBR, Inc. 2006 Stock and Incentive Plan | ||
Form of Performance Award Agreement (US/International Employee Cash/Stock) pursuant to KBR, Inc. 2006 Stock and Incentive Plan | ||
KBR, Inc. Senior Executive Performance Pay Plan, as restated effective January 1, 2020 | ||
KBR, Inc. Management Performance Pay Plan, as restated effective January 1, 2020 | ||
***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 | |
104 | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document contained in Exhibit 101 |
+ | 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: May 1, 2020 Dated: May 1, 2020
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