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EX-32.2 - EXHIBIT 32.2 - KBR, INC.kbr-ex322x20160930.htm
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EX-31.2 - EXHIBIT 31.2 - KBR, INC.kbr-ex312x20160930.htm
EX-31.1 - EXHIBIT 31.1 - KBR, INC.kbr-ex311x20160930.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2016
OR
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from             to
Commission File Number: 1-33146
 
 
 
kbrlogoa10.gif
KBR, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
20-4536774
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
601 Jefferson Street, Suite 3400, Houston, Texas
 
77002
(Address of principal executive offices)
 
(Zip Code)

(713) 753-3011
(Registrant's telephone number including area code)

 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
Smaller reporting company
 
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  ý

As of October 12, 2016, there were 142,668,161 shares of KBR, Inc. Common Stock, par value $0.001 per share, outstanding.

 




.
TABLE OF CONTENTS
 



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 Securities Exchange Act of 1934, as amended. The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Some of the statements contained in this Quarterly Report on Form 10-Q are forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. The words "believe," "may," "estimate," "continue," "anticipate," "intend," "plan," "expect" and similar expressions are intended to identify forward-looking statements. Forward-looking statements include information concerning our possible or assumed future financial performance and results of operations.

We have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. While it is not possible to identify all factors, factors that could cause actual future results to differ materially, include the risks and uncertainties disclosed in our 2015 Annual Report on Form 10-K contained in Part I under "Risk Factors" and in our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2016 and June 30, 2016 in Part II under "Risk Factors" and in this Quarterly Report on Form 10-Q in Part II under "Risk Factors."

Many of these factors are beyond our ability to control or predict. Any of these factors, or a combination of these factors, could materially and adversely affect our future financial condition or results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially and adversely from those projected in the forward-looking statements. We caution against putting undue reliance on forward-looking statements or projecting any future results based on such statements or on present or prior earnings levels. In addition, each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statement.


3



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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Revenues
$
1,073

 
$
1,199

 
$
3,078

 
$
4,016

Cost of revenues
(1,109
)
 
(1,112
)
 
(2,972
)
 
(3,785
)
Gross profit (loss)
(36
)
 
87

 
106

 
231

Equity in earnings of unconsolidated affiliates
19

 
35

 
81

 
123

General and administrative expenses
(43
)
 
(38
)
 
(111
)
 
(119
)
Asset impairment and restructuring charges
(7
)
 
(15
)
 
(21
)
 
(34
)
Gain on disposition of assets

 
6

 
6

 
34

Operating income (loss)
(67
)
 
75

 
61

 
235

Other non-operating income (expense)
(1
)
 
3

 
1

 
4

Income (loss) before income taxes and noncontrolling interests
(68
)
 
78

 
62

 
239

Benefit (provision) for income taxes
11

 
(19
)
 
(27
)
 
(61
)
Net income (loss)
(57
)
 
59

 
35

 
178

Net income attributable to noncontrolling interests
(6
)
 
(4
)
 
(9
)
 
(17
)
Net income (loss) attributable to KBR
$
(63
)
 
$
55

 
$
26

 
$
161

Net income (loss) attributable to KBR per share:
 
 
 
 
 
 
 
Basic
$
(0.44
)
 
$
0.38

 
$
0.18

 
$
1.11

Diluted
$
(0.44
)
 
$
0.38

 
$
0.18

 
$
1.11

Basic weighted average common shares outstanding
142

 
144

 
142

 
144

Diluted weighted average common shares outstanding
142

 
144

 
142

 
144

Cash dividends declared per share
$
0.08

 
$
0.08

 
$
0.24

 
$
0.24

See accompanying notes to condensed consolidated financial statements.

4



KBR, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In millions)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
(57
)
 
$
59

 
$
35

 
$
178

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax
10

 
(13
)
 
21

 
(74
)
Reclassification adjustment included in net income

 

 

 

Foreign currency translation adjustments, net of taxes of $2, $(5), $2 and $(4)
10

 
(13
)
 
21

 
(74
)
Pension and post-retirement benefits, net of tax:
 
 
 
 
 
 
 
Actuarial gains (losses), net of tax

 

 

 

Reclassification adjustment included in net income
6

 
10

 
18

 
32

Pension and post-retirement benefits, net of taxes of $(1), $(2), $(4) and $(7)
6

 
10

 
18

 
32

Changes in fair value of derivatives:
 
 
 
 
 
 
 
Changes in fair value of derivatives, net of tax

 

 

 

Reclassification adjustment included in net income
(1
)
 
1

 
(1
)
 
1

Changes in fair value of derivatives, net of taxes of $0, $0, $0 and $0
(1
)
 
1

 
(1
)
 
1

Other comprehensive income (loss), net of tax
15

 
(2
)
 
38

 
(41
)
Comprehensive income
(42
)
 
57

 
73

 
137

Less: Comprehensive income attributable to noncontrolling interests
(5
)
 
(6
)
 
(8
)
 
(20
)
Comprehensive income (loss) attributable to KBR
$
(47
)
 
$
51

 
$
65

 
$
117

See accompanying notes to condensed consolidated financial statements.


5



KBR, Inc.
Condensed Consolidated Balance Sheets
(In millions, except share data)
 
September 30,
 
December 31,
 
2016
 
2015
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and equivalents
$
569

 
$
883

Accounts receivable, net of allowance for doubtful accounts of $15 and $17
708

 
628

Costs and estimated earnings in excess of billings on uncompleted contracts ("CIE")
390

 
224

Other current assets
123

 
109

Total current assets
1,790

 
1,844

Claims and accounts receivable
528

 
526

Property, plant, and equipment, net of accumulated depreciation of $338 and $352 (including net PPE of $39 and $48 owned by a variable interest entity)
165

 
169

Goodwill
953

 
324

Intangible assets, net of accumulated amortization of $97 and $91
257

 
35

Equity in and advances to unconsolidated affiliates
327

 
281

Deferred income taxes
94

 
99

Other assets
128

 
134

Total assets
$
4,242

 
$
3,412

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
568

 
$
438

Billings in excess of costs and estimated earnings on uncompleted contracts ("BIE")
537

 
509

Accrued salaries, wages and benefits
203

 
173

Nonrecourse project debt
9

 
10

Other current liabilities
233

 
263

Total current liabilities
1,550

 
1,393

Pension obligations
258

 
333

Employee compensation and benefits
90

 
105

Income tax payable
90

 
78

Deferred income taxes
163

 
94

Nonrecourse project debt
40

 
51

Revolving credit agreement
650

 

Deferred income from unconsolidated affiliates
96

 
100

Other liabilities
208

 
206

Total liabilities
3,145

 
2,360

KBR shareholders’ equity:
 
 
 
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and outstanding

 

Common stock, $0.001 par value, 300,000,000 shares authorized, 175,688,535 and 175,108,100 shares issued, and 142,667,745 and 142,058,356 shares outstanding

 

Paid-in capital in excess of par ("PIC")
2,083

 
2,070

Accumulated other comprehensive loss ("AOCL")
(792
)
 
(831
)
Retained earnings
587

 
595

Treasury stock, 33,020,790 and 33,049,744 shares, at cost
(767
)
 
(769
)
Total KBR shareholders’ equity
1,111

 
1,065

Noncontrolling interests ("NCI")
(14
)
 
(13
)
Total shareholders’ equity
1,097

 
1,052

Total liabilities and shareholders’ equity
$
4,242

 
$
3,412

See accompanying notes to condensed consolidated financial statements.

6



KBR, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows provided by (used in) operating activities:
 
 
 
Net income
$
35

 
$
178

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
31

 
29

Equity in earnings of unconsolidated affiliates
(81
)
 
(123
)
Deferred income tax expense
7

 
14

Gain on disposition of assets
(6
)
 
(34
)
Other
10

 
29

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net of allowance for doubtful accounts
9

 
(19
)
Costs and estimated earnings in excess of billings on uncompleted contracts
25

 
168

Accounts payable
39

 
(239
)
Billings in excess of costs and estimated earnings on uncompleted contracts
14

 
(10
)
Accrued salaries, wages and benefits
(19
)
 
(5
)
Reserve for loss on uncompleted contracts
(15
)
 
(100
)
(Advances to) payments from unconsolidated affiliates, net
(3
)
 
10

Distributions of earnings from unconsolidated affiliates
43

 
84

Income taxes payable
(19
)
 
(7
)
Pension funding
(31
)
 
(37
)
Net settlement of derivative contracts
(8
)
 
(40
)
Other assets and liabilities
(23
)
 
17

Total cash flows provided by (used in) operating activities
8

 
(85
)
Cash flows (used in) provided by investing activities:
 
 
 
Purchases of property, plant and equipment
(8
)
 
(8
)
Proceeds from sale of assets or investments
2

 
71

Payments for investments in equity method joint ventures
(5
)
 
(15
)
Acquisition of businesses, net of cash acquired
(911
)
 

Total cash flows (used in) provided by investing activities
$
(922
)
 
$
48


7



KBR, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows provided by (used in) financing activities:
 
 
 
Payments to reacquire common stock
$
(2
)
 
$
(22
)
Acquisition of noncontrolling interest

 
(40
)
Distributions to noncontrolling interests
(9
)
 
(21
)
Payments of dividends to shareholders
(34
)
 
(35
)
Net proceeds from issuance of common stock

 
1

Borrowings on revolving credit agreement
700

 

Payments on revolving credit agreement
(50
)
 

Payments on short-term and long-term borrowings
(5
)
 
(7
)
Other

 
(4
)
Total cash flows provided by (used in) financing activities
600

 
(128
)
Effect of exchange rate changes on cash

 
(37
)
Decrease in cash and equivalents
(314
)
 
(202
)
Cash and equivalents at beginning of period
883

 
970

Cash and equivalents at end of period
$
569

 
$
768

Supplemental disclosure of cash flows information:
 
 
 
Cash paid for interest
$
7

 
$
8

Cash paid for income taxes (net of refunds)
$
31

 
$
56

Noncash financing activities
 
 
 
Dividends declared
$
12

 
$
12

See accompanying notes to condensed consolidated financial statements.

8



KBR, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1. Description of Company and Significant Accounting Policies

KBR, Inc., a Delaware corporation, was formed on March 21, 2006 and is headquartered in Houston, Texas.  KBR, Inc. and its wholly owned and majority-owned subsidiaries (collectively referred to herein as "KBR", "the Company", "we", "us" or "our") is a global provider of differentiated, professional services and technologies across the asset and program life cycle within the hydrocarbons and government services industries. Our capabilities include highly-specialized engineering services, mission and logistics support solutions, technology licensing, consulting, procurement, construction, construction management, program management, operations, maintenance and other support services to a diverse customer base, including  domestic and foreign governments, international and national oil and gas companies, independent refiners, petrochemical producers, fertilizer producers and manufacturers.
  
Principles of Consolidation

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") and include the accounts of KBR and our wholly owned and majority-owned subsidiaries and variable interest entities ("VIEs") of which we are the primary beneficiary. We account for investments over which we have significant influence but not a controlling financial interest using the equity method of accounting. See Note 9 to our condensed consolidated financial statements for further discussion on our equity investments and VIEs. The cost method is used when we do not have the ability to exert significant influence. All material intercompany balances and transactions are eliminated in consolidation.

Certain prior year amounts have been reclassified to conform to the current year presentation on the condensed consolidated statements of operations, condensed consolidated balance sheets and the condensed consolidated statements of cash flows.

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

Use of Estimates

The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas requiring significant estimates and assumptions by our management include the following:

project revenues, costs and profits on engineering and construction contracts, including recognition of estimated losses on uncompleted contracts
project revenues, costs and profits on government services contracts
provisions for uncollectible receivables and client claims and recoveries of costs from subcontractors, vendors and others
provisions for income taxes and related valuation allowances and tax uncertainties
recoverability of goodwill
recoverability of other intangibles and long-lived assets and related estimated lives
recoverability of equity method and cost method investments
valuation of pension obligations and pension assets
accruals for estimated liabilities, including litigation accruals
consolidation of VIEs
valuation of share-based compensation
valuation of assets and liabilities acquired in business combinations

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


9



Adoption of New Accounting Standards

Consolidation. Effective January 1, 2016, we adopted Accounting Standards Update ("ASU") No. 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation Analysis, which was issued by the Financial Accounting Standards Board ("FASB") on February 18, 2015. This ASU amends the consolidation guidance for VIEs as well as general partners’ investments in limited partnerships and modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities. ASU 2015-02 is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods. The adoption of ASU 2015-02 did not have a material impact on our financial statements.

Additional Balance Sheet Information

Other Current Assets

Included in the "other current assets" balance on our condensed consolidated balance sheets as of September 30, 2016 and December 31, 2015 are prepaid taxes and other prepaid assets of $61 million and $58 million, respectively.

Other Current Liabilities

The components of "other current liabilities" on our condensed consolidated balance sheets as of September 30, 2016 and December 31, 2015 are presented below:
 
September 30,
 
December 31,
Dollars in millions
2016
 
2015
Reserve for estimated losses on uncompleted contracts (a)
$
53

 
$
60

Retainage payable
45

 
49

Income taxes payable
24

 
56

Value-added tax payable
14

 
12

Insurance payable
13

 
12

Dividend payable
12

 
12

Other miscellaneous liabilities (b)
72

 
62

Total other current liabilities
$
233

 
$
263

 
(a)
See Note 2 for further discussion on our reserve for estimated losses on uncompleted contracts.
(b)
Included in "other miscellaneous liabilities" is deferred rent of $4 million and $7 million as of September 30, 2016 and December 31, 2015, respectively.

Other Liabilities

Included in "other liabilities" on our condensed consolidated balance sheets as of September 30, 2016 and December 31, 2015 is noncurrent deferred rent of $110 million and $114 million, respectively. Also included in "other liabilities" is a payable to our former parent of $19 million in each of the periods presented. This amount will be paid to our former parent upon receipt of a tax refund from the United States ("U.S.") Internal Revenue Service in an amount greater than or equal to $19 million.



10



Note 2. Business Segment Information

We are organized into three core business segments and two non-core business segments. Our three core business segments focus on our core strengths in technology and consulting, engineering and construction, and government services. Our two non-core business segments are our Non-strategic Business segment, which includes businesses we intend to exit upon completion of existing contracts because they are no longer a part of our future strategic focus, and "Other", which includes our corporate expenses and general and administrative expenses not allocated to the other business segments. Each business segment excluding Other reflects a reportable segment led by a separate business segment president who reports directly to our chief operating decision maker ("CODM").  Business segment performance is evaluated by our CODM using gross profit (loss) and equity in earnings of unconsolidated affiliates, which is defined as business segment revenues less the cost of revenues, and includes overhead directly attributable to the business segment.

Our business segments are described below.

Technology & Consulting ("T&C"). Our T&C business segment combines proprietary KBR technologies, knowledge-based services and our three specialist consulting brands, Granherne, Energo and GVA, under a single customer-facing global business.  This business segment provides licensed technologies and consulting services throughout the oil and gas value chain, from wellhead to crude refining and through to specialty chemicals production.  In addition to sharing many of the same customers, these brands share the approach of early and continuous customer involvement as they deliver optimal solutions to meet customer objectives through early planning and scope definition, advanced technologies, and project lifecycle support.
Engineering & Construction ("E&C"). Our E&C business segment leverages our operational and technical excellence as a global provider of engineering, procurement, construction ("EPC"), commissioning and maintenance services for oil and gas, refining, petrochemical and chemical customers.  E&C is managed on a geographic basis in order to facilitate close proximity to our customers and our people, while utilizing a consistent global execution strategy. 
Government Services ("GS"). Our GS business segment provides full life-cycle support solutions to defense, space, aviation and other programs and missions for governmental agencies in the U.S., United Kingdom ("U.K."), and Australia. These solutions span from research and development, through systems engineering, test and evaluation, to program management, operations, maintenance and field logistics. Our recent acquisitions, as described in Note 3 to our condensed consolidated financial statements, have been combined with our existing U.S. operations within this business segment and are transitioning to operate under the "KBRwyle" brand.
Non-strategic Business. Our Non-strategic Business segment represents the operations or activities that we intend to exit upon completion of existing contracts. This segment also included businesses we exited upon sale to third parties during 2015.
Other. Our Other business segment includes our corporate expenses and general and administrative expenses not allocated to the business segments above and any future activities that do not individually meet the criteria for segment presentation. 

The following table presents revenues, gross profit (loss), equity in earnings of unconsolidated affiliates and operating income (loss) by reporting segment.

11



Operations by Reportable Segment
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
Dollars in millions
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Technology & Consulting
$
67

 
$
79

 
$
262

 
$
231

Engineering & Construction
595

 
828

 
1,822

 
2,758

Government Services
401

 
176

 
840

 
489

Other

 

 

 

Subtotal
1,063

 
1,083

 
2,924

 
3,478

Non-strategic Business
10

 
116

 
154

 
538

Total revenues
$
1,073

 
$
1,199

 
$
3,078

 
$
4,016

Gross profit (loss):
 
 
 
 
 
 
 
Technology & Consulting
$
17

 
$
17

 
$
49

 
$
57

Engineering & Construction
1

 
48

 
65

 
155

Government Services
32

 
8

 
94

 
3

Other

 

 

 

Subtotal
50

 
73

 
208

 
215

Non-strategic Business
(86
)
 
14

 
(102
)
 
16

Total gross profit (loss)
$
(36
)
 
$
87

 
$
106

 
$
231

Equity in earnings of unconsolidated affiliates:
 
 
 
 
 
 
 
Technology & Consulting
$

 
$

 
$

 
$

Engineering & Construction
11

 
26

 
52

 
87

Government Services
8

 
9

 
29

 
36

Other

 

 

 

Subtotal
19

 
35

 
81

 
123

Non-strategic Business

 

 

 

Total equity in earnings of unconsolidated affiliates
$
19

 
$
35

 
$
81

 
$
123

Asset impairment and restructuring charges:
 
 
 
 
 
 
 
Technology & Consulting
$
(1
)
 
$

 
$
(1
)
 
$
(1
)
Engineering & Construction
(6
)
 
(13
)
 
(20
)
 
(25
)
Government Services

 

 

 

Other

 
(1
)
 

 
(5
)
Subtotal
(7
)
 
(14
)
 
(21
)
 
(31
)
Non-strategic Business

 
(1
)
 

 
(3
)
Total asset impairment and restructuring charges
$
(7
)
 
$
(15
)
 
$
(21
)
 
$
(34
)
Segment operating income (loss):
 
 
 
 
 
 
 
Technology & Consulting
$
16

 
$
16

 
$
44

 
$
53

Engineering & Construction
(2
)
 
61

 
76

 
201

Government Services
25

 
15

 
104

 
34

Other
(21
)
 
(28
)
 
(65
)
 
(92
)
Subtotal
18

 
64

 
159

 
196

Non-strategic Business
(85
)
 
11

 
(98
)
 
39

Total segment operating income (loss)
$
(67
)
 
$
75

 
$
61

 
$
235



12



Changes in 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. However, historically, our estimates have been reasonably dependable regarding the recognition of revenues and profit on percentage of completion contracts. Changes in estimates by business segment, which significantly impacted operating income during the periods presented, are as follows:

Engineering & Construction

During the three and nine months ended September 30, 2016, we recognized unfavorable changes in estimates of losses of $40 million and $110 million, respectively, on an EPC ammonia project in the U.S. primarily due to unforeseen costs related to the mechanical failure of a vendor supplied compressor and pumps that occurred during commissioning as well as various mechanical issues encountered during start-up. These issues delayed completion of the project to October 2016, which resulted in increased costs and our recognition of contractual liquidated damages due to the client. Included in the reserve for estimated losses on uncompleted contracts, which is a component of "other current liabilities" on our condensed consolidated financial statements, is $6 million and $4 million as of September 30, 2016 and December 31, 2015, respectively, related to this project. The project has completed performance testing and in October 2016, care, custody and control of the plant were transferred to the customer. Our estimates of revenues and costs at completion have been, and may continue to be, impacted by remaining punch list items and warranty obligations. Our estimated loss at completion as of September 30, 2016 represents our best estimate based on current information. Actual results could differ from the estimates we have used to account for this project as of September 30, 2016. During the three and nine months ended September 30, 2015, we recognized an unfavorable change in estimated costs at completion on this project of $12 million and $13 million, respectively, primarily due to increased subcontractor costs.

During the three and nine months ended September 30, 2016, we recognized $9 million of additional gross profit resulting from a favorable change in estimate resulting from the final settlement of outstanding claims on a legacy project in Canada partially offset by a reduction in gross profit of $7 million on an EPC project in the U.S. from unfavorable changes in estimated costs due to schedule mitigation activities associated with weather delays. The EPC project is 52% complete as of September 30, 2016.

During the three and nine months ended September 30, 2016, revenues, gross profit, and segment operating income include $3 million and $59 million, respectively, related to a favorable change in estimate as a result of reaching a settlement on close out of a liquefied natural gas ("LNG") project in Africa.

During the three and nine months ended September 30, 2015, we recognized favorable changes in estimates of losses of $4 million and $21 million, respectively, on our seven Canadian pipe fabrication and module assembly projects, primarily due to negotiated settlements. All of these projects were completed in 2015.

Government Services

During the nine months ended September 30, 2016, revenues, gross profit, and segment operating income included a favorable change in estimate of $33 million as a result of reaching a settlement with the U.S. government for reimbursement of previously expensed legal fees associated with the sodium dichromate litigation. See Note 13 to our condensed consolidated financial statements for information related to the settlement with the U.S. government. Additionally, we recognized a $15 million favorable change to gross profit related to the approval of a change order on a road construction project in the Middle East. The change order resulted in an extension of the contract terms and increased the total contract value.


13



Non-strategic Business

During the three and nine months ended September 30, 2016, we recognized unfavorable changes in estimates of losses on a power project of $86 million and $112 million, respectively, primarily due to an increase in forecast costs to complete the project driven by subcontractor cost increases from poor subcontractor productivity, resulting schedule delays and changes in the project execution strategy. Included in the reserve for estimated losses on uncompleted contracts, which is a component of "other current liabilities" on our condensed consolidated financial statements, is $35 million and $47 million as of September 30, 2016 and December 31, 2015, respectively, related to this project. The project has a contract value of $572 million and was approximately 85% complete as of September 30, 2016. We expect to complete this power project in the first half of 2017. Our estimates of revenues and costs at completion have been, and may continue to be, impacted by our performance, the performance of our subcontractors, and the U.S. labor market. Our estimated loss at completion as of September 30, 2016 represents our best estimate based on current information. Actual results could differ from the estimates we have used to account for this project as of September 30, 2016. During the three and nine months ended September 30, 2015, there were no significant changes in our estimates of losses on projects being executed within this business segment.

Note 3. Acquisitions, Dispositions and Other Transactions

During the nine months ended September 30, 2016, we acquired several businesses. In accordance with FASB Accounting Standards Codification ("ASC") Topic 805, Business Combinations, we accounted for these transactions using the acquisition method. We conducted external and internal valuations of certain acquired assets and liabilities for inclusion in our balance sheet as of the date of acquisition. Assets that would not normally be recorded in ordinary operations (i.e., customer relationships and other intangibles) were recorded at their estimated fair values. The excess of preliminary purchase price over the estimated fair values of the net assets acquired was recorded as goodwill. We expect to complete the purchase price allocation during the 12-month period following the acquisition date, in line with the acquisition method of accounting, during which time the value of the assets and liabilities, including any goodwill, may be revised as appropriate.

Honeywell Technology Solutions Inc. ("HTSI") Acquisition

On September 16, 2016, we acquired 100% of the outstanding common stock of HTSI from Honeywell International Inc. HTSI provides an array of mission-critical services and customized solutions throughout the world, primarily to U.S. government agencies. This acquisition provides KBR with complete lifecycle service capabilities, including high-end technical engineering and mission support, cyber security and logistics and equipment maintenance within our GS business segment.

The aggregate consideration paid for the acquisition was $300 million, less $25 million of initial working capital adjustments for net cash consideration of $275 million, all of which was funded by an advance on our Credit Agreement (as defined in Note 11 to our condensed consolidated financial statements). The final settlement of the working capital adjustments is expected in December of 2016. Accordingly, adjustments to the initial purchase accounting for the acquired net assets will likely be completed during the first quarter of 2017, as we obtain additional information regarding the facts and circumstances that existed as of the acquisition date.

We recognized goodwill of $124 million arising from the acquisition, which relates primarily to growth opportunities based on a broader service offering of the combined operations, including HTSI's specialized technical services and KBR's logistical expertise as well as expected cost synergies. Approximately $110 million of the goodwill is deductible for income tax purposes. This acquisition is reported within our GS business segment. We recognized acquisition-related costs of $7 million, which are included in "General and administrative expenses" in our condensed consolidated statement of operations for the nine months ended September 30, 2016.

14



The following table summarizes the consideration paid for this acquisition and the fair value of the assets acquired and liabilities assumed as of the acquisition date.
Dollars in millions
 
Fair value of total consideration transferred
$
275

 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Trade receivables, net
29

CIE
93

Prepaids and other current assets
5

Total current assets
127

Property, plant and equipment, net
7

Intangible assets (a):
 
Customer relationships
63

Backlog
7

Deferred income taxes
8

Total assets
212

 
 
Accounts payable
23

BIE
5

Other current liabilities
33

Total current liabilities
61

 
 
Goodwill
$
124

 
(a)
These intangible assets are amortized over their estimated useful lives up to 20 years.

HTSI’s results of operations have been included in our condensed consolidated statements of operations for periods subsequent to the acquisition on September16, 2016. The acquired HTSI businesses contributed $21 million of revenues and $2 million of gross profit for the period from September 16, 2016 through September 30, 2016. Due to the timing of the HTSI acquisition in September 2016 and the incomplete nature of the initial purchase accounting for the acquired net assets of HTSI, we have omitted certain disclosures for supplemental pro forma financial information. We intend to provide these disclosures in future filings. In connection with the transaction, we entered into a transition services agreement with the seller for a period of up to six months and primarily relates to payroll processing, human resources, information technology, real estate and other support services provided by the seller.

Wyle Inc. ("Wyle") Acquisition

On July 1, 2016, we acquired 100% of the equity interests of Wyle from its shareholders, including Court Square Capital Partners and certain officers of Wyle, pursuant to an agreement and plan of merger. Wyle delivers an array of custom solutions for customers in the U.S. Department of Defense, NASA and other federal agencies. Wyle's expertise includes systems and sustainment engineering, program and acquisition management, life science research, space medical operations, information technology and the testing and evaluation of aircraft, advanced systems and networks. The acquisition will combine KBR's strengths in international, large-scale government logistics and support operations with Wyle's specialized technical services, largely focused in the contiguous U.S.

The aggregate consideration paid for the acquisition was $600 million, including repayment of outstanding balances under Wyle's credit facility and other transaction expenses, plus $23 million of purchase price adjustments, which resulted in net cash consideration of $623 million. We funded the total cash paid with a $400 million advance on our Credit Agreement and available cash on-hand. See Note 11 to our condensed consolidated financial statements for information related to our Credit Agreement.


15



We recognized goodwill of $484 million arising from the acquisition, which relates primarily to growth opportunities based on a broader service offering of the combined operations, including Wyle's differentiated technical capabilities and KBR's international program management and logistics expertise. Additionally, goodwill relates to the existence of Wyle's skilled employee base and other expected synergies of the combined operations. Approximately $107 million of the goodwill is deductible for income tax purposes. Certain data necessary to complete the purchase price allocation is not yet available and primarily relates to final tax returns that provide the underlying tax basis of assets and liabilities. This acquisition is reported within our GS business segment. We recognized acquisition related costs in "General and administrative expenses" in our condensed consolidated statement of operations of $3 million for the nine months ended September 30, 2016.

The following table summarizes the consideration paid for this acquisition and the fair value of the assets acquired and liabilities assumed as of the acquisition date.
Dollars in millions
 
Fair value of total consideration transferred
$
623

 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Cash
10

Trade receivables, net
47

CIE
98

Prepaids and other current assets
4

Total current assets
159

Property, plant and equipment, net
10

Intangible assets (a):
 
Customer relationships
82

Trademarks/trade names
48

Backlog
11

Total assets
310

 
 
Accounts payable
59

Other current liabilities
47

Total current liabilities
106

Deferred income taxes
53

Other liabilities
12

Total liabilities
171

 
 
Goodwill
$
484

 
(a)
These intangible assets are amortized over their estimated useful lives up to 20 years with the exception of Trademarks/trade names which have an indefinite life.

Wyle’s results of operations have been included in our condensed consolidated statements of operations for periods subsequent to the acquisition on July 1, 2016. The acquired Wyle businesses contributed $177 million of revenues and $12 million of gross profit for the period from July 1, 2016 through September 30, 2016.

The following supplemental pro forma results of operations assume that Wyle had been acquired as of January 1, 2015. The supplemental pro forma financial information was prepared based on the historical financial information of Wyle and has been adjusted to give effect to pro forma adjustments that are both directly attributable to the transaction and factually supportable. The pro forma amounts reflect certain adjustments to amortization expense and interest expense associated with the portion of the purchase price funded by a $400 million advance on our Credit Agreement. The pro forma amounts also reflect adjustments to the 2016 results to exclude acquisition related costs as they are nonrecurring and directly attributable to the transaction.

The supplemental pro forma financial information presented below does not include any anticipated cost savings or expected realization of other synergies associated with the transaction. Accordingly, this supplemental pro forma financial information is

16



presented for informational purposes only and is not necessarily indicative of what the actual results of operations of the combined company would have been had the acquisition occurred on January 1, 2015, nor is it indicative of future results of operations.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
Dollars in millions
2016
 
2015
 
2016
 
2015
Revenue
1,072

 
1,425

 
3,508

 
4,680

Net income (loss) attributable to KBR
(62
)
 
60

 
37

 
180

Diluted earnings per share
(0.43
)
 
0.42

 
0.26

 
1.25


Chematur Subsidiaries Acquisition

On January 11, 2016, we acquired 100% of the outstanding common stock of three subsidiaries of Connell Chemical Industry LLC (through its subsidiary, Chematur Technologies AB): Plinke GmbH ("Plinke"), Weatherly Inc., ("Weatherly") and Chematur Ecoplanning Oy ("Ecoplanning"). Plinke specializes in proprietary technology and specialist equipment for the purification and concentration of inorganic acids used or produced in hydrocarbon processing facilities. Weatherly provides nitric acid and ammonium nitrate proprietary technologies and services to the fertilizer market. Ecoplanning offers proprietary evaporation and crystallization technologies and specialist equipment for weak acid and base solutions. As a result of this acquisition, we can expand our technology and consulting solutions into new markets while leveraging KBR's global sales and EPC capabilities.

The aggregate consideration paid for the acquisition was $25 million, less $3 million of acquired cash and other adjustments resulting in net cash consideration of $23 million. The consideration paid included an escrow of $5 million that secures the indemnification obligations of the seller and other contingent obligations related to the operation of the business.

We recognized goodwill of $22 million arising from the acquisition, which relates primarily to future growth opportunities to extend the acquired technologies outside North America to new customers and in revamping units of the existing customer base globally. None of the goodwill is deductible for income tax purposes. The purchase price allocation is substantially complete with the exception of final tax returns that provide the underlying tax basis of assets and liabilities. This acquisition is reported within our T&C business segment. We recognized acquisition related costs in "General and administrative expenses" on our condensed consolidated statement of operations of $1 million for the nine months ended September 30, 2016.


17



The following table summarizes the consideration paid for this acquisition and the fair value of the assets acquired and liabilities assumed as of the acquisition date and subsequent working capital adjustments.
Dollars in millions
 
Fair value of total consideration transferred
$
25

 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Cash
2

Trade receivables, net
5

CIE
8

Prepaids and other current assets
8

Total current assets
23

Intangible assets (a):
 
Developed technology
10

Customer relationships
7

Trademarks/trade names
2

Other assets
1

Total assets
43

 
 
Accounts payable
2

BIE
13

Other current liabilities
8

Total current liabilities
23

Deferred income taxes
11

Other liabilities
6

Total liabilities
40

 
 
Goodwill
$
22

 
(a)
These intangible assets are amortized over their estimated useful lives up to 20 years with the exception of Trademarks/trade names which have an indefinite life.

As a result of this acquisition, $4 million and $18 million of revenues for the three and nine months ended September 30, 2016, respectively, and a gross loss of less than $1 million for the three months ended September 30, 2016 and break even for the nine months ended September 30, 2016, respectively, were included in our condensed consolidated statements of operations.

New Investments

In February 2016, we executed agreements to establish a new joint venture within our GS business segment. See Note 9 to our condensed consolidated financial statements for information related to the establishment of this new joint venture.

Note 4. Cash and Equivalents

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


18



The components of our cash and equivalents balance are as follows:
 
September 30, 2016
Dollars in millions
International (a)
 
Domestic (b)
 
Total
Operating cash and equivalents
$
129

 
$
190

 
$
319

Short-term investments (c)
193

 
5

 
198

Cash and equivalents held in joint ventures
47

 
5

 
52

Total
$
369

 
$
200

 
$
569


 
December 31, 2015
Dollars in millions
International (a)
 
Domestic (b)
 
Total
Operating cash and equivalents
$
177

 
$
253

 
$
430

Short-term investments (c)
293

 
107

 
400

Cash and equivalents held in joint ventures
49

 
4

 
53

Total
$
519

 
$
364

 
$
883

 
(a)
Includes deposits held in non-U.S. operating accounts.
(b)
Includes U.S. dollar and foreign currency deposits held in operating accounts that constitute onshore cash for tax purposes but may reside either in the U.S. or in a foreign country.
(c)
Includes time deposits, money market funds, and other highly liquid short-term investments.

Note 5. Accounts Receivable
    
The components of our accounts receivable, net of allowance for doubtful accounts balance are as follows:
 
September 30, 2016
Dollars in millions
Retainage
 
Trade & Other
 
Total
Technology & Consulting
$
3

 
$
55

 
$
58

Engineering & Construction
67

 
368

 
435

Government Services
5

 
188

 
193

Other

 
3

 
3

Subtotal
75

 
614

 
689

Non-strategic Business
5

 
14

 
19

Total
$
80

 
$
628

 
$
708


 
December 31, 2015
Dollars in millions
Retainage
 
Trade & Other
 
Total
Technology & Consulting
$

 
$
70

 
$
70

Engineering & Construction
51

 
402

 
453

Government Services
2

 
75

 
77

Other

 
2

 
2

Subtotal
53

 
549

 
602

Non-strategic Business
9

 
17

 
26

Total
$
62

 
$
566

 
$
628



19



Note 6. Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts and Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts
Our CIE balances by business segment are as follows:
 
September 30,
 
December 31,
Dollars in millions
2016
 
2015
Technology & Consulting
$
25

 
$
42

Engineering & Construction
123

 
114

Government Services
242

 
68

Subtotal
390

 
224

Non-strategic Business

 

Total
$
390

 
$
224


Our BIE balances by business segment are as follows:
 
September 30,
 
December 31,
Dollars in millions
2016
 
2015
Technology & Consulting
$
52

 
$
72

Engineering & Construction
347

 
307

Government Services
67

 
69

Subtotal
466

 
448

Non-strategic Business
71

 
61

Total
$
537

 
$
509


Unapproved change orders and claims

The amounts of unapproved change orders and claims included in determining the profit or loss on contracts are as follows:
Dollars in millions
2016
 
2015
Amounts included in project estimates-at-completion at January 1,
$
46

 
$
31

Additions
12

 
48

Approved change orders
(32
)
 
(40
)
Adjustment due to disposition of business

 
(6
)
Amounts included in project estimates-at-completion at September 30,
$
26

 
$
33

 
 
 
 
Amounts recorded in revenues on a percentage-of-completion basis at September 30,
$
24

 
$
32


The table above excludes unapproved change orders and claims related to our unconsolidated affiliates. Our proportionate share of unapproved change orders and claims was $65 million as of September 30, 2016 and $59 million as of September 30, 2015 on a project in our E&C business segment.

Liquidated damages

Some of our engineering and construction contracts have schedule dates and performance obligations that if not met could subject us to penalties for liquidated damages. These generally relate to specified activities that must be completed by a set contractual date or by achievement of a specified level of output or throughput. Each contract defines the conditions under which a customer may make a claim for liquidated damages. However, in some instances, liquidated damages are not asserted by the customer, but the potential to do so is used in negotiating or settling claims and closing out the contract. Any accrued liquidated damages are recognized as a reduction in revenues in our condensed consolidated statements of operations.

It is possible that liquidated damages related to several projects totaling $5 million and $6 million at September 30, 2016 and December 31, 2015, respectively, could be incurred if the projects are completed as currently forecasted. However, based

20



upon our evaluation of our performance, we have concluded these liquidated damages are not probable and therefore, they have not been recognized.

Note 7. Claims and Accounts Receivable

The components of our claims and accounts receivable account balance not expected to be collected within the next 12 months are as follows:
 
September 30,
 
December 31,
Dollars in millions
2016
 
2015
Engineering & Construction
$
400

 
$
400

Government Services
128

 
126

Total
$
528

 
$
526


Our E&C business segment's claims and accounts receivable is related to our EPC 1 arbitration. See Note 14 to our condensed consolidated financial statements under PEMEX and PEP Arbitration for further discussion.

Our GS business segment's claims and accounts receivable reflects claims filed with the U.S. government related to payments not yet received for cost incurred under various U.S. government contracts. 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 above is $83 million as of September 30, 2016 and December 31, 2015, 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 discussions. The amount above also includes $45 million and $43 million as of September 30, 2016 and December 31, 2015, respectively, related to contracts where our 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 such 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 8. Restructuring

In connection with our long-term strategic reorganization, we announced that beginning in the fourth quarter of 2014 we would undertake a restructuring, which would include actions such as reducing the amount of real estate we utilized and significantly reducing our workforce. There were additional actions undertaken in 2015 and 2016, including staff reductions to support current business levels. The employees affected by these reductions are eligible for separation benefits upon their termination and the dates have occurred or are expected to occur through 2017. The table below provides a rollforward of one-time charges associated with employee terminations based on the fair value of the termination benefits. These amounts are included in "other current liabilities" on our condensed consolidated balance sheets.
Dollars in millions
Severance Accrual
Balance at December 31, 2015
$
19

Charges
15

Payments
(21
)
Balance at September 30, 2016
$
13

 
 
Balance at December 31, 2014
$
21

Charges
11

Payments
(23
)
Balance at September 30, 2015
$
9



21



Note 9. Equity Method Investments and Variable Interest Entities

We conduct some of our operations through joint ventures which operate through partnership, corporation, undivided interest and other business forms and are principally accounted for using the equity method of accounting. Additionally, the majority of our joint ventures are VIEs.

The following table presents a rollforward of our equity in and advances to unconsolidated affiliates:
 
September 30,
 
December 31,
Dollars in millions
2016
 
2015
Beginning balance
$
281

 
$
151

Equity in earnings of unconsolidated affiliates
81

 
149

Distribution of earnings of unconsolidated affiliates (a)
(43
)
 
(92
)
Advances (receipts)
3

 
(10
)
Investments (b)
5

 
80

Foreign currency translation adjustments
(1
)
 
(9
)
Other
(7
)
 
1

Balance before reclassification
$
319

 
$
270

Reclassification of excess distributions (a)
12

 
16

Recognition of excess distributions (a)
(4
)
 
(5
)
Ending balance
$
327

 
$
281

 
(a)
We received cash dividends in excess of the carrying value of one of our investments. We have no obligation to return any portion of the cash dividends received. We recorded the excess dividend amount as "deferred income from unconsolidated affiliates" on our condensed consolidated balance sheets and recognize these dividends as earnings are generated by the investment.
(b)
In 2015, investments included a $58 million investment in the Brown & Root Industrial Services joint venture, a $24 million investment in EPIC Piping LLC ("EPIC") joint venture, and the disposition of a joint venture included in the sale of the Building Group.

Equity Method Investments

New Investments

U.K. Military Flying Training System ("UKMFTS") project. In February 2016, Affinity Flying Training Services Ltd. ("Affinity"), a joint venture between KBR and Elbit Systems, was awarded a service contract by a third party to procure, operate and maintain aircraft, and aircraft-related assets over an 18-year contract period, in support of the UKMFTS project. KBR owns a 50% interest in Affinity. In addition, KBR owns a 50% interest in the two joint ventures, Affinity Capital Works and Affinity Flying Services, which provide procurement, operations and management support services under subcontracts with Affinity. The remaining 50% interest in these entities is held by Elbit Systems. KBR has provided its proportionate share of certain limited financial and performance guarantees in support of the partners' contractual obligations. The three project-related entities are VIEs; however, KBR is not the primary beneficiary of any of these entities.  We account for KBR's interests in each entity using the equity method of accounting within our GS business segment. The project is funded through KBR and Elbit Systems provided equity, subordinated debt and non-recourse third party commercial bank debt.  During the first quarter of 2016, under the terms of the subordinated debt agreement between the partners and Affinity, we advanced our proportionate share, or $14 million, to meet initial working capital needs of the venture. We expect repayment on the advance and the associated interest over the term of the project. The amount is included in the "equity in and advances" balance on our condensed consolidated balance sheets as of September 30, 2016 and in "(Advances to) payments from unconsolidated affiliates, net" in our condensed consolidated statement of cash flows for the nine months ended September 30, 2016.

Unconsolidated Variable Interest Entities

Generally, our maximum exposure to loss is limited to our equity investment in the joint venture and any amounts payable to us for services we provided to the joint venture reduced for any unearned revenues on the projects. On the Affinity joint venture, our maximum exposure to loss is limited to our proportionate share of any amounts required to fund future losses incurred by

22



those entities under their respective contracts with the project company. On the Aspire Defence project, in addition to the maximum exposure to loss indicated in the table below, we have exposure to any losses incurred by the construction or operating joint ventures under their respective subcontract arrangements with the project company. Our exposure is, however, limited to our equity participation in these entities. The Ichthys LNG joint venture executes a project that has a lump sum component; in addition to the maximum exposure to loss indicated in the table below, we have an exposure to losses to the extent of our ownership percentage in the joint venture if the project exceeds the lump sum component. Our maximum exposure to loss on the EBIC Ammonia plant reflects our 65% ownership of the development corporation which owns 25% of the company that consolidates the ammonia plant. We continue to monitor our investment in this joint venture as the profitability of its operations has been impacted by the challenges related to the availability of natural gas feedstock in Egypt.

The following summarizes the total assets and total liabilities as reflected in our condensed consolidated balance sheets as well as our maximum exposure to losses related to our unconsolidated VIEs in which we have a significant variable interest but are not the primary beneficiary.

 
September 30, 2016
Dollars in millions
Total assets
 
Total liabilities
 
Maximum
exposure to 
loss
Affinity project
$
12

 
$
3

 
$
12

Aspire Defence project
$
14

 
$
116

 
$
14

Ichthys LNG project
$
125

 
$
46

 
$
125

U.K. Road projects
$
31

 
$
10

 
$
31

EBIC Ammonia plant (65% interest)
$
34

 
$
2

 
$
21

 
 
December 31, 2015
Dollars in millions
Total assets
 
Total liabilities
 
Maximum
exposure to 
loss
Aspire Defence project
$
17

 
$
121

 
$
17

Ichthys LNG project
$
87

 
$
63

 
$
87

U.K. Road projects
$
34

 
$
11

 
$
34

EBIC Ammonia plant (65% interest)
$
36

 
$
2

 
$
22


Related Party Transactions

We often provide engineering, construction management and other subcontractor services to our joint ventures and our revenues include amounts related to these services. For the nine months ended September 30, 2016 and 2015, our revenues included $179 million and $223 million, respectively, related to the services we provided to our joint ventures, primarily within our E&C business segment. Under the terms of our transition services agreement ("TSA") with Brown & Root Industrial Services joint venture, we collect cash from customers and make payments to vendors and employees on behalf of the joint venture. For the nine months ended September 30, 2016, we incurred approximately $13 million of reimbursable costs under the TSA. In addition, in 2015, we entered into an alliance agreement with our EPIC joint venture to provide certain pipe fabrication services to KBR. For the nine months ended September 30, 2016, EPIC performed $22 million of services to KBR under the agreement.


23



Amounts included in our condensed consolidated balance sheets related to services we provided to our unconsolidated joint ventures as of September 30, 2016 and December 31, 2015 are as follows:
 
September 30,
 
December 31,
Dollars in millions
2016
 
2015
Accounts receivable, net of allowance for doubtful accounts (a)
$
30

 
$
7

Costs and estimated earnings in excess of billings on uncompleted contracts (b)
$
1

 
$
5

Billings in excess of costs and estimated earnings on uncompleted contracts (b)
$
51

 
$
55

Accounts payable (c)
$

 
$
9

 
(a)
Includes a $19 million net receivable from the Brown & Root Industrial Services joint venture at September 30, 2016.
(b)
Reflects CIE and BIE primarily related to joint ventures within our E&C business segment as discussed above.
(c)
Reflects a $9 million net payable to the Brown & Root Industrial Services joint venture at December 31, 2015.

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
September 30, 2016
Total assets
 
Total liabilities
Gorgon LNG project
$
29

 
$
62

Escravos Gas-to-Liquids project
$
16

 
$
27

Fasttrax Limited project
$
62

 
$
57

 

Dollars in millions
December 31, 2015
Total assets
 
Total liabilities
Gorgon LNG project
$
117

 
$
145

Escravos Gas-to-Liquids project
$
16

 
$
33

Fasttrax Limited project
$
74

 
$
70



24



Note 10. Pension Plans

The components of net periodic benefit cost related to pension benefits for the three and nine months ended September 30, 2016 and 2015 were as follows:
 
Three Months Ended September 30,
 
2016
 
2015
Dollars in millions
United States
 
Int’l
 
United States
 
Int’l
Components of net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$

 
$

 
$

 
$

Interest cost
1

 
15

 
1

 
19

Expected return on plan assets
(1
)
 
(21
)
 

 
(24
)
Recognized actuarial loss

 
7

 
1

 
11

Net periodic benefit cost
$

 
$
1

 
$
2

 
$
6

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2016
 
2015
Dollars in millions
United States
 
Int’l
 
United States
 
Int’l
Components of net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$

 
$
1

 
$

 
$
1

Interest cost
2

 
48

 
2

 
57

Expected return on plan assets
(2
)
 
(67
)
 
(2
)
 
(73
)
Recognized actuarial loss
1

 
21

 
4

 
35

Net periodic benefit cost
$
1

 
$
3

 
$
4

 
$
20


For the nine months ended September 30, 2016, we have contributed approximately $31 million of the $41 million we expect to contribute to our international plans in 2016.

Note 11. Debt and Other Credit Facilities

Credit Agreement

On September 25, 2015, we entered into a $1 billion, unsecured revolving credit agreement (the "Credit Agreement") with a syndicate of banks. The Credit Agreement is guaranteed by certain of the Company's domestic subsidiaries, matures in September 2020 and is available for cash borrowings and the issuance of letters of credit related to general corporate needs. Subject to certain conditions, we may request (i) that the aggregate commitments under the Credit Agreement be increased by up to an additional $500 million, and (ii) that the maturity date of the Credit Agreement be extended by two additional one-year terms.

Amounts drawn under the Credit Agreement will bear interest at variable rates, per annum, based either on (i) the London interbank offered rate ("LIBOR") plus an applicable margin of 1.375% to 1.75%, or (ii) a base rate plus an applicable margin of 0.375% to 0.75%, with the base rate equal to the highest of (a) reference bank’s publicly announced base rate, (b) the Federal Funds Rate plus 0.5%, or (c) LIBOR plus 1%. The amount of the applicable margin to be applied will be determined by the Company’s ratio of consolidated debt to consolidated EBITDA for the prior four fiscal quarters as defined in the Credit Agreement. The Credit Agreement provides for fees on letters of credit issued under the Credit Agreement at a rate equal to the applicable margin for LIBOR-based loans, except for performance letters of credit, which are priced at 50% of such applicable margin. KBR pays an annual issuance fee of 0.125% of the face amount of a letter of credit and pays a commitment fee of 0.225% to 0.25%, per annum, on any unused portion of the commitment under the Credit Agreement based on the Company's consolidated leverage ratio. As of September 30, 2016, there were $95 million in letters of credit outstanding. As a result of the Wyle and HTSI acquisitions discussed in Note 3 to our condensed consolidated financial statements, we funded $700 million of acquisition consideration with borrowings under our Credit Agreement, of which $650 million remains outstanding as of September 30, 2016. We intend to seek long-term financing to replace a portion of this debt in early 2017.


25



The Credit Agreement contains customary covenants as defined by the agreement which include financial covenants requiring maintenance of a ratio of consolidated debt to a rolling four-quarter consolidated EBITDA not greater than 3.5 to 1 and a minimum consolidated net worth of $1.2 billion plus 50% of consolidated net income for each quarter beginning September 30, 2015 and 100% of any increase in shareholders’ equity attributable to the sale of equity interests, but excluding any adjustments in shareholders' equity attributable to changes in foreign currency translation adjustments.

The Credit Agreement contains a number of other covenants restricting, among other things, our ability to incur additional liens and indebtedness, enter into asset sales, repurchase our equity shares and make certain types of investments. Our subsidiaries are restricted from incurring indebtedness, except if such indebtedness relates to purchase money obligations, capitalized leases, refinancing or renewals secured by liens upon or in property acquired, constructed or improved in an aggregate principal amount not to exceed $200 million at any time outstanding. Additionally, our subsidiaries may incur unsecured indebtedness not to exceed $200 million in aggregate outstanding principal amount at any time. We are also permitted to repurchase our equity shares, provided that no such repurchases shall be made from proceeds borrowed under the Credit Agreement, and that the aggregate purchase price and dividends paid after September 25, 2015, does not exceed the Distribution Cap (equal to the sum of $750 million plus the lesser of (1) $400 million and (2) the amount received by us in connection with the arbitration and subsequent litigation of the PEP contracts as discussed in Note 14 to our condensed consolidated financial statements). As of September 30, 2016, the remaining availability under the Distribution Cap was approximately $664 million.

Nonrecourse Project Debt

Fasttrax Limited, a joint venture in which we indirectly own a 50% equity interest with an unrelated partner, was awarded a concession contract in 2001 with the U.K. Ministry of Defense ("MoD") to provide a Heavy Equipment Transporter Service to the British Army. Under the terms of the arrangement, Fasttrax Limited operates and maintains 91 heavy equipment transporters ("HETs") for a term of 22 years. The purchase of the HETs by the joint venture was financed through two series of bonds secured by the assets of Fasttrax Limited and a bridge loan totaling approximately £84.9 million (approximately $120 million at the exchange rate on the date of the transaction). The secured bonds are an obligation of Fasttrax Limited and are not a debt obligation of KBR as they are nonrecourse to the joint venture partners. Accordingly, in the event of a default on the notes, the lenders may only look to the assets of Fasttrax Limited for repayment. The bridge loan of approximately £12.2 million (approximately $17 million at the exchange rate on the date of the transaction) was replaced when the joint venture partners funded their equity and subordinated debt contributions in 2005.

The secured bonds were issued in two classes consisting of Class A 3.5% Index Linked Bonds in the amount of £56 million (approximately $79 million at the exchange rate on the date of the transaction) and Class B 5.9% Fixed Rate Bonds in the amount of £16.7 million (approximately $24 million at the exchange rate on the date of the transaction).  Semi-annual payments on both classes of bonds commenced in March 2005 and will continue through maturity in 2021.  The subordinated notes payable to each of the partners initially bear interest at 11.25% increasing to 16% over the term of the notes until maturity in 2025.  Semi-annual payments on the subordinated notes commenced in March 2006. 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 17% and 43% for the three and nine months ended September 30, 2016, respectively. The effective tax rate for the three and nine months ended September 30, 2015 was approximately 24% and 26%, respectively. The tax rates for the three and nine months ended September 30, 2016 reflect project losses in the U.S. for which we do not recognize tax benefits as well as a discrete tax benefit in the quarter related to a recovery of foreign withholding taxes previously expensed associated with a completed EPC project in Nigeria.

Our estimated annual effective tax rate for 2016 is currently projected to be 52%, which is higher than the U.S. statutory rate of 35% primarily due to project losses in the U.S. for which we do not recognize tax benefits as well as forecasted income in higher tax rate jurisdictions. Our estimated annual effective rate is subject to change based on the actual jurisdictions where our 2016 earnings are generated.

Our foreign subsidiaries generate earnings that are not subject to U.S. income taxes so long as they are permanently reinvested in our operations outside of the U.S. Undistributed earnings of foreign subsidiaries that are no longer permanently reinvested become subject to deferred income taxes under U.S. tax law. Prior to the third quarter of 2016, we asserted that the undistributed earnings of our foreign subsidiaries above the amount for which we had already provided income taxes continued to be considered permanently reinvested. As a result of strategic business acquisitions and previously announced estimated contract losses during the third quarter, we determined the need to reevaluate our permanent reinvestment assertion of certain undistributed foreign

26



earnings. Likewise, we have provided cumulative income taxes of $40 million on certain foreign earnings which provide us, if necessary, the ability to repatriate an additional $300 million of international cash without recognizing additional tax expense.

In determining whether the undistributed earnings of our foreign subsidiaries are permanently reinvested, we consider our future U.S. and non-U.S. cash needs such as 1) our anticipated foreign working capital requirements, including funding of our U.K. pension plan, 2) the expected growth opportunities across all geographical markets and 3) our plans to invest in strategic growth opportunities that may include acquisitions around the world. The remaining international cash balances associated with past foreign earnings which we currently consider to be permanently reinvested in our foreign entities are not available for domestic use. Our undistributed earnings above the previously established amounts for which we have already provided income taxes continue to be considered permanently reinvested in the foreseeable future. These undistributed earnings could be subject to additional tax if remitted, or deemed remitted, as a dividend.

The valuation allowance for deferred tax assets as of September 30, 2016 and December 31, 2015 was $541 million and $542 million, respectively. The change in the valuation allowance was $5 million and $(48) million in the three months ended September 30, 2016 and 2015, respectively, and $(1) million and $(60) million for the nine months ended September 30, 2016 and 2015, respectively. The valuation allowance is primarily related to foreign tax credit carryforwards, foreign and state net operating loss carryforwards and other deferred tax assets that, in the judgment of management, are not more-likely-than-not to be realized. The changes in the valuation allowance for the three and nine months ended September 30, 2016 is reflective of an increase in the valuation of our foreign tax credit carryforwards primarily offset by a decrease in the valuation allowance related to deferred taxes provided on certain foreign earnings.

The reserve for uncertain tax positions included in "other liabilities" and "deferred income taxes" on our condensed consolidated balance sheets as of September 30, 2016 and December 31, 2015 was $274 million and $257 million, respectively. The balance at September 30, 2016 includes a $14 million reserve for uncertain tax positions from acquisitions that occurred during the third quarter.

Note 13. U.S. Government Matters

We provide services to various U.S. governmental agencies, which include the U.S. Department of Defense ("DoD") 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.

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 continue to support the U.S. government around the world under the LogCAP IV and other contracts. We have been in the process of closeout of the LogCAP III contract since 2011, and we expect the closeout process to continue through at least 2017. 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 contracts. The closeout process includes resolving objections raised by the U.S. government through a billing dispute process referred to as Form 1s and Memorandums for Record ("MFRs") and resolving issues raised in U.S. government audits. 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 Armed Services Board of Contract Appeals ("ASBCA") or the U.S. Court of Federal Claims ("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. At this time, we cannot determine the timing or net amounts to be collected or paid to close out these contracts.

Form 1s

The U.S. government has issued Form 1s questioning or objecting to costs we billed to them primarily related to (1) our use of private security and our provision of containerized housing under the LogCAP III contract discussed above and (2) our provision of emergency construction services primarily to U.S. government facilities damaged by Hurricanes Katrina and Wilma, under our CONCAP III contract with the U.S. Navy. As a consequence of the issuance of the Form 1s, the U.S. government has withheld payment to us on outstanding invoices, pending resolution of these matters. In certain cases, we have also withheld payment to our subcontractors related to pay-when-paid contractual terms.


27



The U.S. government had issued Form 1s, questioning $173 million of billed costs as of September 30, 2016 and December 31, 2015. They had previously paid us $90 million as of each period related to our services on these contracts and the remaining balance of $83 million for each period is included in “claims and accounts receivable" on our condensed consolidated balance sheets. In addition, we have withheld $32 million from our subcontractors at September 30, 2016 and December 31, 2015, related to these questioned costs.

While we continue to believe that the amounts we have invoiced the U.S. government are in compliance with our contract terms and that recovery is probable, we also continue to evaluate our ability to recover these amounts as new information becomes known. As is common in the industry, negotiating and resolving these matters is often an involved and lengthy process, which sometimes necessitates the filing of claims or other legal action as discussed above. Concurrent with our continued negotiations with the U.S. government, we await the rulings on the filed claims. We are unable to predict when the rulings will be issued or when the matters will be settled or resolved with the U.S. government.

Audits

In addition to reviews performed by the U.S. government through the Form 1 process, the negotiation, administration and settlement of our contracts, which primarily consist of DoD contracts, are subject to audit by the Defense Contract Audit Agency ("DCAA"). The U.S. government DCAA serves in an advisory role to the Defense Contract Management Agency ("DCMA") and the DCMA is responsible for the administration of the majority of our contracts. The scope of these audits include, among other things, the validity of direct and indirect incurred costs, provisional approval of annual billing rates, approval of annual overhead rates, compliance with the Federal Acquisition Regulations ("FAR") and Cost Accounting Standards ("CAS"), compliance with certain unique contract clauses and audits of certain aspects of our internal control systems.

As of September 30, 2016, the DCAA has completed audits and we have concluded negotiations of both direct and indirect incurred costs for the years of performance under LogCAP III (2003-2014). The DCAA is scheduling reviews for other active projects for the years subsequent to 2014. The direct claimed cost for these years still to be reviewed was $240 million and the indirect costs invoiced for these years amount to $18 million.

Historically, we have recovered 99.9% of the direct and indirect costs we have claimed for reimbursement from the U.S. government. As a result, for the open audit years we have accrued our estimate of disallowed costs based on our historical recovery rate as a reduction to "claims and accounts receivable" and in "other liabilities" on our condensed consolidated balance sheets. Based on the information received to date, we do not believe the ongoing government audits will have a material adverse impact on our results of operations, financial position or cash flows.

As a result of the Form 1s, open audits and claims discussed above, we have accrued a reserve for unallowable costs at September 30, 2016 and December 31, 2015 of $58 million and $50 million, respectively, as a reduction to "claims and accounts receivable" and in "other liabilities" on our condensed consolidated balance sheet.

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 False Claims Act ("FCA"), which prohibits in general terms fraudulent billings to the 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, Electrocution, and Burn Pit matters described below are billable under the LogCAP III contract or, in the case of the Electrocution litigation, covered by insurance, and that any such costs or damages awarded in the Sodium Dichromate matter are billable under the Restore Iraqi Oil (“RIO”) contract and the related indemnity described below. All costs billed under LogCAP III or RIO are subject to audit by the DCAA for reasonableness.

First Kuwaiti Trading Company arbitration. In April 2008, First Kuwaiti Trading Company ("FKTC"), one of our LogCAP III subcontractors providing housing containers, filed for arbitration with the American Arbitration Association of 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. We paid FKTC $19 million and will pay $4 million on pay-when-paid terms in the contract. We have accrued amounts we believe are payable to FKTC in "accounts payable" and "other current liabilities" on our condensed consolidated balance sheets. The remaining $26 million owed to FKTC under the contract has not been billed to the government and we will not do so until the related claims and disputes between KBR and the government over the FKTC living container contract are resolved (see Department of Justice ("DOJ") False Claims Act complaint - FKTC Containers below). At this time, we believe the likelihood we would incur a loss related to this matter is remote.


28



Electrocution litigation. During 2008, a lawsuit was filed against KBR in the Allegheny County Common Pleas Court alleging that the Company was responsible for an electrical incident which resulted in the death of a soldier at the Radwaniyah Palace Complex near Baghdad, Iraq. Plaintiffs are claiming unspecified damages for personal injury, death and loss of consortium by the parents. The case is currently pending before the U.S. District Court for the Western District of Pennsylvania, and the court is considering a number of KBR's dispositive motions. KBR will continue to pursue all available jurisdictional and other dismissal options. At this time, we believe the likelihood we would incur a loss related to this matter is remote. As of September 30, 2016, no amounts have been accrued.

Burn Pit litigation. From November 2008 through current, KBR has been served with in excess of 60 lawsuits in various states alleging exposure to toxic materials resulting from the operation of burn pits in Iraq or Afghanistan in connection with services provided by KBR under the LogCAP III contract. These suits have been consolidated and are pending in U.S. Federal District Court in Baltimore, Maryland, where a hearing on KBR’s jurisdictional motions is scheduled for December 2016. The plaintiffs are claiming unspecific damages. KBR will continue to pursue all available jurisdictional and other dismissal options. At this time, we believe the likelihood that we would incur a loss related to this matter is remote. As of September 30, 2016, no amounts have been accrued.

Sodium Dichromate litigation. From December 2008 through September 2009, five cases were filed in various Federal District Courts against KBR by national guardsmen and other military personnel alleging exposure to sodium dichromate at the Qarmat Ali Water Treatment Plant in Iraq in 2003, which were consolidated into the case pending in the U.S. District Court for the Southern District of Texas. The Texas case was then dismissed by the Court on the merits on multiple grounds including the conclusion that no one was injured and is now on appeal to the Fifth Circuit. The plaintiffs are claiming unspecified damages. At this time, we believe the likelihood that we would incur a loss related to this matter is remote. As of September 30, 2016, no amounts have been accrued.

COFC/ASBCA Claims. During the period of time since the first sodium dichromate litigation was filed, we have incurred legal defense costs that we believe are reimbursable under the related U.S. government contract. We have billed for these costs and filed claims to recover the associated costs incurred to date. Due to KBR's inability to procure adequate insurance coverage for this work, the Secretary of the Army approved the inclusion of an indemnification provision in the RIO Contract pursuant to Public Law 85-804. After KBR filed claims for payment, the ASBCA issued an order in August 2015 holding that KBR is entitled to reimbursement of the sodium dichromate legal fees and any resulting judgments pursuant to the 85-804 indemnity agreement. This ruling was eligible for appeal and was subsequently appealed by the USACE in December 2015. On June 23, 2016, KBR and USACE entered into a settlement agreement regarding reimbursement of the $33 million in legal fees and interest incurred through the time of the claim. As part of the settlement, all reasonable future defense costs and payment of awards will be reimbursed consistent with the Government's indemnity obligation. This matter is now resolved.
  
Qui tams. We believe the likelihood that we would incur a loss in the qui tams the U.S. government has not joined is remote and as of September 30, 2016, no amounts have been accrued. Costs incurred in defending the qui tams cannot be billed to the U.S. government until those matters are successfully resolved in our favor. If successfully resolved, we can bill 80% of the costs to the U.S. government under the federal regulations. As of September 30, 2016, we have incurred and expensed $10 million in legal costs to date in defending ourselves in qui tams. Five of the remaining qui tam cases either have been dismissed, are on appeal from a dismissal or are at the dismissal stage. There are two active cases as discussed below.

Barko qui tam. Relator Harry Barko, a KBR subcontracts administrator in Iraq for a year in 2004/2005, filed a qui tam lawsuit in June 2005 in the U.S. District Court for the District of Columbia, alleging violations of the FCA by KBR and KBR subcontractors Daoud & Partners and Eamar Combined for General Trading and Contracting. The DOJ investigated Barko's allegations and elected not to intervene. The claim was unsealed in March of 2009. The court is currently considering KBR's motion for summary judgment. At this time, we believe the likelihood that we would incur a loss related to this matter is remote. As of September 30, 2016, no amounts have been accrued.

Howard qui tam. In March 2011, Geoffrey Howard 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 Department of Justice declined to intervene and the case was partially unsealed. The case is starting discovery. At this time, we believe the likelihood that we would incur a loss related to this matter is remote. As of September 30, 2016, no amounts have been accrued.

DOJ False Claims Act complaint - FKTC Containers. In November 2012, the U.S. Department of Justice filed a complaint in the U.S. District Court for the Central District of Illinois against KBR, FKTC and others, related to our settlement of delay claims by our subcontractor, FKTC, in connection with FKTC's provision of living trailers for the bed down mission in Iraq in 2003-2004. The DOJ alleges that KBR submitted false claims to the U.S. government for reimbursement of costs for FKTC's

29



services of, which the U.S. government alleges were inflated, unverified, not subject to an adequate price analysis and had been contractually assumed by FKTC. Our contractual dispute with the Army over this settlement has been ongoing since 2005. In March 2014, KBR's motion to dismiss was denied and in September 2014, the District Court granted FKTC's motion to dismiss for lack of personal jurisdiction. The case is currently in discovery which we expect to be substantially completed in 2017. At this time, we believe the likelihood that we would incur a loss related to this matter is remote. As of September 30, 2016, no amounts have been accrued.

KBR Contract Claim on FKTC containers. KBR previously filed a claim before the ASBCA to recover the costs paid to FKTC to settle its delay and disruption claims. 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. On February 19, 2016, the ASBCA, at KBR’s request, lifted the stay and has allowed KBR to proceed with its contract claim for the costs withheld. KBR has requested a trial date as early in 2017 as the ASBCA’s schedule will permit.

DOJ False Claims Act complaint - Iraq Subcontractor. In January 2014, the U.S. Department of Justice 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, FTKC 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. As of September 30, 2016, 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. At this time, we believe the likelihood that we would incur a loss related to this matter in excess of the amounts we have accrued is remote. Discovery in the case is set to close July 13, 2017 with the trial set to begin January 22, 2018.

Note 14. Other Commitments and Contingencies

Litigation and regulatory matters related to the Company’s restatement of its 2013 annual financial statements
In re KBR, Inc. Securities Litigation. Lead plaintiffs, Arkansas Public Employees Retirement System and IBEW Local 58/NECA Funds, seek class action status on behalf of our shareholders, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against the Company, our former chief executive officer, our current and former chief financial officers, and our former chief accounting officer, arising out of the restatement of our 2013 annual financial statements, and seek undisclosed damages. The case is currently pending in the U.S. District Court for the Southern District of Texas. KBR's Motion to Dismiss was denied in September 2015. We intend to continue to vigorously defend against these claims. Discovery in the case has begun and is expected to continue through early 2017. At this time, we expect legal fees incurred in defending this claim to reach or exceed the retention amount of our directors & officers liability insurance policy beyond which such costs should be recoverable from insurers. We believe the likelihood that we would incur a loss related to this matter is remote. Legal fees to date have been expensed as incurred.

Butorin v. Blount et al, is a May 2014 shareholder derivative complaint pending in the U.S. District Court of Delaware and filed on behalf of the Company naming certain current and former members of the Company's board of directors as defendants and the Company as a nominal defendant. The complaint alleges that the named directors breached their fiduciary duties by permitting the Company's internal controls to be inadequate. KBR has filed a Motion to Dismiss, to which the derivative plaintiff has responded. At this time, we are not yet able to determine the likelihood of loss, if any, arising from this matter.
Stella Dupree and Donald Taylor v. KBR, Inc., was filed by shareholders of the Company on May 12, 2015 in Delaware Chancery Court seeking the right to inspect and make copies of certain books and records of the Company under §220 of Delaware General Corporation Law relating primarily to the restatement of our 2013 annual financial statements. The remaining plaintiff voluntarily dismissed this case on February 26, 2016 following receipt of a limited set of documents from the Company. This matter is now resolved.
We have also received requests for information and a subpoena for documents from the Securities Exchange Commission ("SEC") regarding the restatement of our 2013 annual financial statements. We have been and intend to continue cooperating with the SEC.

PEMEX and PEP Arbitration

30




In 2004, we filed for arbitration with the International Chamber of Commerce ("ICC") claiming recovery of damages against PEP, a subsidiary of PEMEX, the Mexican national oil company, related to a 1997 contract between PEP and our subsidiary, Commissa, and PEP subsequently counterclaimed. The project, known as EPC 1, required Commissa to build offshore platforms and treatment and reinjection facilities in Mexico and encountered significant schedule delays and increased costs due to problems with design work, late delivery and defects in equipment, increases in scope and other changes. In 2009, the ICC arbitration panel awarded us a total of approximately $351 million including legal and administrative recovery fees as well as interest and PEP was awarded approximately $6 million on counterclaims, plus interest on a portion of that sum. In August 2016, the U.S. Court of Appeal for the Second Circuit affirmed a 2013 District Court ruling confirming the ICC award and PEP filed a Motion for Rehearing in September 2016. PEP has posted $465 million as security for the judgment, pending exhaustion of all appeals.

Mexico Proceedings. PEP's initial multiple attempts to nullify the award in Mexico were rejected by the Mexican courts. However, in September 2011, the Collegiate Court ruled that PEP, by administratively rescinding the contract in 2004, deprived the arbitration panel of jurisdiction and the award was null and void. PEP continues to litigate in Mexico. After Mexican courts ruled that they had no jurisdiction to hear further litigation, PEP obtained an amparo from a Mexican court stating that PEP’s rights had been denied when the other courts declined to take jurisdiction. Commisa has appealed the amparo.

Other Proceedings. Commisa also initiated collection proceedings in Luxembourg and sought to collect under the North American Free Trade Agreement, the latter of which has been denied pending collection efforts in the U.S. and in Luxembourg.

Performance Bonds

We had provided approximately $80 million in performance bonds to PEP when the project was awarded. The bonds were written by a Mexican bond company and backed by a U.S. insurance company which is indemnified by KBR. As a result of the ICC arbitration award in December 2009, the panel determined that KBR had performed on the project and recovery on the bonds by PEP was precluded.  Notwithstanding, PEP filed an action in Mexico in June 2010 against the Mexican bond company to collect the bonds. On June 17, 2013, after proceedings in multiple Mexican courts, we were required to pay $108 million to the Mexican bond company, which consists of the $80 million in outstanding bonds, $26 million in related interest and other expenses and $2 million in legal and banking fees.

Consistent with our treatment of probable claim recoveries, we have recorded $400 million of the ICC arbitration award, net of advances, in "claims and accounts receivable" on the condensed consolidated balance sheets. PEP has posted $465 million in cash collateral in the U.S. under the control of the Federal District Court in New York. In addition we have taken action to attach assets in Luxembourg as additional protection to collect on the ICC arbitration award. Although it is possible we could resolve and collect the amounts due from PEP in the next 12 months, we believe the timing of the collection of the award is uncertain; therefore, consistent with our prior practice, as of September 30, 2016, we continue to classify the amount recorded for financial reporting purposes due from PEP as long term.

Other Matters

The U.S. DOJ and the SEC are conducting investigations of activities Unaoil, a Monaco based company, may have engaged in related to international projects involving several global companies, as well as KBR's interactions with Unaoil. KBR is cooperating with the DOJ and the SEC in their investigations, which includes the voluntary submission of information and compliance with document requests, including a formal request from the SEC by subpoena.


31



Note 15. Shareholders’ Equity

The following tables summarize our activity in shareholders’ equity:
Dollars in millions
Total
 
PIC
 
Retained
Earnings
 
Treasury
Stock
 
AOCL
 
NCI
Balance at December 31, 2015
$
1,052

 
$
2,070

 
$
595

 
$
(769
)
 
$
(831
)
 
$
(13
)
Share-based compensation
14

 
14

 

 

 

 

Tax benefit increase related to share-based plans

 

 

 

 

 

Dividends declared to shareholders
(34
)
 

 
(34
)
 

 

 

Repurchases of common stock
(2
)
 

 

 
(2
)
 

 

Issuance of ESPP shares
3

 
(1
)
 

 
4

 

 

Distributions to noncontrolling interests
(9
)
 

 

 

 

 
(9
)
Net income
35

 

 
26

 

 

 
9

Other comprehensive income (loss), net of tax
38

 

 

 

 
39

 
(1
)
Balance at September 30, 2016
$
1,097

 
$
2,083

 
$
587

 
$
(767
)
 
$
(792
)
 
$
(14
)
 
 
 
 
 
 
 
 
 
 
 
 
Dollars in millions
Total
 
PIC
 
Retained
Earnings
 
Treasury
Stock
 
AOCL
 
NCI
Balance at December 31, 2014
$
935

 
$
2,091

 
$
439

 
$
(712
)
 
$
(876
)
 
$
(7
)
Acquisition of noncontrolling interest
(40
)
 
(40
)
 

 

 

 

Share-based compensation
14

 
14

 

 

 

 

Common stock issued upon exercise of stock options
1

 
1

 

 

 

 

Dividends declared to shareholders
(35
)
 

 
(35
)
 

 

 

Repurchases of common stock
(22
)
 

 

 
(22
)
 

 

Issuance of ESPP shares
5

 

 

 
5

 

 

Distributions to noncontrolling interests
(21
)
 

 

 

 

 
(21
)
Net income
178

 

 
161

 

 

 
17

Other comprehensive income (loss), net of tax
(41
)
 

 

 

 
(44
)
 
3

Balance at September 30, 2015
$
974

 
$
2,066

 
$
565

 
$
(729
)
 
$
(920
)
 
$
(8