Item 1A. Risk Factors
Risks Related to Operations of our Business
The widespread outbreak of a pandemic or epidemic, or the outbreak of an infectious disease, such as COVID-19, may materially adversely affect our business, results of operations and/or cash flows, including as a result of widespread reduced demand for oil and reduced commodity prices resulting from oversupply of oil or storage constraints.
The spread of COVID-19 across the globe has negatively affected worldwide economic and commercial activity, disrupted global supply chains, and created significant volatility and disruption of financial and commodity markets.Further, while the supply of hydrocarbon commodities was reduced somewhat, demand fell even more sharply as a result of COVID-19 and prices saw a sharp drop in the first quarter 2020.Our business and operational plans may be adversely affected by the COVID-19 pandemic due to a number of factors outside of our control, including:
•the health or availability of our workforce, including contractors and subcontractors, and restrictions that we and our customers, contractors and subcontractors impose, including limiting worksite access and facility shutdowns, to ensure the safety of employees and others;
•the ability or willingness of our vendors and suppliers to provide the equipment, parts or raw materials for our operations or otherwise fulfill their contractual obligations, which in turn could impair our ability to perform under our contracts or to deliver products on a timely basis;
•recommendations of, or restrictions imposed by, government and health authorities, including travel bans, quarantines, and shelter-in-place orders to address the COVID-19 outbreak;
•potential contract delays, modifications or terminations;
•increased potential for the occurrence of operational hazards, including terrorism, cyber-attacks or domestic vandalism, as well as information system failures or communication network disruptions;
•reductions in the number and amounts of new government contract awards, delays in the timing of anticipated awards or potential cancellations of such prospects as a result of the fiscal, economic and budgetary challenges facing our customers, as well as material and equipment pricing;
•increased cost and reduced availability of capital for growth or capital expenditures;
•increased costs of operation in relation to the COVID-19 outbreak, which costs may not be fully recoverable or adequately covered by insurance; and
•long-term disruption of the U.S. and global economy and financial and commodity markets.
The spread of COVID-19 has caused us to significantly modify our business practices (including limiting employee and contractor presence at our work locations), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, contractors, customers, suppliers and communities. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be adversely impacted.
As the potential effects of COVID-19 are difficult to predict, the duration of any potential business disruption or the extent to which COVID-19 may negatively affect our operating results is uncertain. Any potential impact will depend on future developments and new information that may emerge regarding the spread, severity and duration of the COVID-19 pandemic and the actions taken by authorities to contain it or treat its impact, all of which are beyond our control. These potential effects, while uncertain, could adversely affect our business, financial condition, results of operations and/or cash flows, as well as our ability to pay dividends to our shareholders.
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Demand for our services and technologies depends on demand and capital spending by customers in their target markets, many of which are cyclical in nature, have been reduced in light of declining commodity prices, and have been significantly impacted by COVID-19.
Demand for many of our services in our commodity-based markets depends on capital spending by oil and natural gas companies, including national and international oil companies, and by industrial companies, which is directly affected by trends in oil, natural gas and commodities prices. Market prices for oil, natural gas and commodities have been volatile in recent years reducing the revenues and earnings of our customers. Further, the hydrocarbon commodities supply and demand imbalances, combined with the continued outbreak of COVID-19, contributed to a sharp drop in prices for oil in the first quarter of 2020.Although the supply of hydrocarbon commodities was reduced somewhat, demand fell even more sharply as a result of COVID-19.The average spot price of West Texas Intermediate (Cushing) crude oil declined to below $0 during April 2020, and more recently closed at $48.35 on December 31, 2020.
These market conditions make it difficult for our customers to accurately forecast and plan future business trends and activities that in turn could have a significant impact on the activity levels of our businesses.As a result, several leading international and national oil companies reduced their capital expenditures in 2020.Demand for LNG and other facilities for which we provide services has decreased, and could continue to decrease, in light of the sustained reduction in the price and demand for crude oil or natural gas resulting from COVID-19.Perceptions of longer-term lower oil and natural gas prices by oil and gas companies or longer-term higher material and contractor prices impacting facility costs have caused and may continue to cause our customers to reduce or defer major expenditures given the long-term nature of many large-scale projects.Even relatively minor changes in supply and demand have the potential to cause large fluctuations in the prices of oil, natural gas and commodities, as well as lead to significant market uncertainty and a variety of other factors that are beyond our control.Factors affecting the prices of oil, natural gas and other commodities include, but are not limited to:
•world health events, including the COVID-19 pandemic, which has reduced and may continue to reduce demand for oil and natural gas because of reduced economic activity;
•changes in the level of global demand for oil, natural gas, and industrial services due in part to governmental regulations, including travel bans and restrictions, quarantines, shelter in place orders, and shutdowns;
•worldwide or regional political, social or civil unrest, military action and economic conditions;
•governmental regulations or policies, including the policies of governments regarding the use of energy and the exploration for and production and development of their oil and natural gas reserves;
•a reduction in energy demand as a result of energy taxation or a change in consumer spending patterns;
•global economic growth or decline;
•the global level of oil and natural gas production;
•potential shut-ins of production by producers due to lack of downstream demand or storage capacity;
•global weather conditions and natural disasters;
•oil refining capacity;
•shifts in end-customer preferences toward fuel efficiency and the use of natural gas;
•potential acceleration of the development and expanded use of alternative fuels;
•environmental regulation, including limitations on fossil fuel consumption based on concerns about its relationship to climate change; and
•reduction in demand for the commodity-based markets in which we operate.
Our results of operations depend on the award of new contracts and the timing of the performance of these contracts.
Our revenues are directly or indirectly derived from contract awards. Reductions in the number and amounts of new awards, delays in the timing of anticipated awards or potential cancellations of such prospects as a result of economic conditions, material and equipment pricing and availability or other factors could adversely impact our long-term projected results. It is particularly difficult to predict whether or when we will receive large-scale international and domestic projects as these contracts usually involve a lengthy and complex bidding and selection process. This process can be affected by a number of factors including market conditions and governmental and environmental approvals. Because a portion of our revenues is generated from such projects, our results of operations and cash flows can fluctuate significantly from quarter to quarter depending on the timing of our contract awards and the commencement or progress of work under awarded contracts. In addition, many of these contracts are subject to financing and similar contingencies and, as a result, we are subject to the risk that the customer will not be able to secure the necessary financing for a project to proceed.
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The uncertainty of our contract award timing can also present difficulties in matching workforce size with contract needs. In some cases, we maintain and bear the cost of a ready workforce that is larger than necessary under existing contracts in expectation of future workforce needs for anticipated contract awards. If an anticipated contract award is delayed or not received, we may incur additional costs resulting from reductions in staff or redundancy of facilities that could have a material adverse effect on our business, financial condition and results of operations.
The U.S. government awards its contracts through a rigorous competitive process and our efforts to obtain future contracts from the U.S. government may be unsuccessful.
The U.S. government conducts a rigorous competitive process for awarding most contracts. In the services arena, the U.S. government uses multiple contracting approaches. Historically, omnibus contract vehicles have been used for work that is done on a contingency or as-needed basis. In more predictable “sustainment” environments, contracts may include both fixed-price and cost-reimbursable elements. The U.S. government also favors multiple award task order contracts in which several contractors are selected as eligible bidders for future work. Such processes require successful contractors to continually anticipate customer requirements and develop rapid-response bid and proposal teams as well as maintain supplier relationships and delivery systems to react to emerging needs. In addition, U.S. government procurement practices sometimes emphasize price over qualitative factors, such as technical capability and past performance. As a result of these competitive pricing pressures, our profit margins on future U.S. government contracts may be reduced and may require us to make sustained efforts to reduce costs to remain competitive.
We face rigorous competition and pricing pressures for any additional contract awards from the U.S. government. Many of our existing contracts must be recompeted when their original period of performance ends. Recompetitions represent opportunities for competitors to take market share away from us or for our customers to obtain more favorable terms. We may be required to qualify or continue to qualify under the various multiple award task order contract criteria. Therefore, it may be more difficult for us to win future awards from the U.S. government and we may have other contractors sharing in U.S. government awards that we win. Once a contract is awarded, it may be subject to a lengthy protest process that could result in contract delays, or ultimately, the loss of the contract.
A portion of our revenues is generated by large, recurring business from certain significant customers. A loss, cancellation or delay in projects by our significant customers in the future could negatively affect our revenues.
A considerable percentage of our revenues, particularly in our GS business segment, is generated from transactions with certain significant customers. Revenues from the U.S. government represented 53% of our total consolidated revenues for the year ended December 31, 2020. The loss of one or more of our significant customers, or the cancellation or delay in their projects, could adversely affect our revenues and results of operations.
If we are unable to enforce our intellectual property rights, or if our intellectual property rights become obsolete, our competitive position could be adversely impacted.
We utilize a variety of intellectual property rights in providing services to our customers. We view our portfolio of process and design technologies as one of our competitive strengths and we use it as part of our efforts to differentiate our service offerings. We may not be able to successfully preserve these intellectual property rights in the future, and these rights could be invalidated, circumvented, challenged or infringed upon. In addition, the laws of some foreign countries in which our services may be sold do not protect intellectual property rights to the same extent as the laws of the U.S. We also license technologies from third parties and there is a risk that our relationships with licensors may terminate, expire or be interrupted or harmed. If we are unable to protect and maintain our intellectual property rights, or if there are any successful intellectual property challenges or infringement proceedings against us, our ability to differentiate our service offerings could diminish. In addition, if our intellectual property rights or work processes become obsolete, we may not be able to differentiate our service offerings and some of our competitors may be able to offer more attractive services to our customers. As a result, our business and financial performance could be materially and adversely affected.
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If we are unable to attract and retain senior management and key technical professionals with elite skills, our ability to pursue and compete for projects to grow our business may be adversely affected, our operating income may decrease, and our reputation may be negatively impacted.
The reimagined KBR and its forward looking solutions strategy requires talent with dynamic and elite skills as KBR moves upmarket. Our rate of growth and the success of our business depend upon our ability to attract, develop, retain, and replace key qualified technical and management professionals, either through direct hire, subcontracts or acquisition of other firms, who possess the elite skills to successfully deliver the solutions strategy. The market for these professionals is competitive in the sectors in which we compete, and we rely heavily upon the expertise and leadership of our professionals to perform, execute and complete projects as required by our clients. If we are unable to attract and retain a sufficient number of elite skilled professionals, our ability to pursue projects may be adversely affected, our financial performance may decline, and our reputation may be damaged.
The nature of our legacy business exposes us to potential liability claims and contract disputes that may exceed or be excluded from existing insurance coverage.
We engage in activities for large facilities where design, construction or systems failures can result in substantial injury or damage to employees or other third parties or delays in completion or commencement of commercial operations, exposing us to legal proceedings, investigations and disputes. The nature of our business results in clients, subcontractors and vendors occasionally presenting claims against us for recovery of costs they incurred in excess of what they expected to incur or for which they believe they are not contractually liable. If it is determined that we have liability, we may not be covered by insurance or, if covered, the dollar amount of these liabilities may exceed our policy limits. Our professional liability coverage is on a “claims-made” basis covering only claims actually made during the policy period currently in effect. In addition, even where insurance is maintained for such exposures, the policies have deductibles, which result in our assumption of exposure for a layer of coverage with respect to any such claims. Any liability not covered by our insurance, in excess of our insurance limits or if covered by insurance but subject to a high deductible, could result in a significant loss for us, which may reduce our profits and cash available for operations.
We occasionally bring claims against project owners for additional costs exceeding the contract price or for amounts not included in the original contract price. These types of claims occur due to matters such as owner-caused delays or changes from the initial project scope that may result in additional direct and indirect costs. Often these claims can be the subject of lengthy negotiations, arbitration or litigation proceedings, and it is difficult to accurately predict when these claims will be fully resolved. When these types of events occur and unresolved claims are pending, we may invest significant working capital in projects to cover cost overruns pending the resolution of the relevant claims. A failure to fully or promptly recover on these types of claims could have a material adverse impact on our liquidity and financial results.
For example, we executed a project as a partner in the JKC joint venture with JGC and Chiyoda, on a joint and several basis, for the design, procurement, fabrication, construction, commissioning and testing of the Ichthys Onshore LNG export facility in Darwin, Australia. As further discussed in Notes 6 and 10 to our consolidated financial statements, the project experienced significant cost increases associated with a variety of issues related to changes to the scope of work, delays and lower than planned subcontractor productivity. These issues resulted in significant unapproved change orders and claims against the client as well as estimated recoveries of claims against suppliers and subcontractors that have been included in the project estimates-at-completion. We have funded our proportionate share of the working capital requirements of JKC to complete the project. JKC's current estimates for the unapproved change orders and claims against the client and estimated recoveries of claims against suppliers and subcontractors may prove inaccurate and potentially result in refunds to the client for amounts previously paid to the joint venture or the inability of the joint venture to recover additional costs from its suppliers and subcontractors. We have letters of credit outstanding in support of performance and warranty guarantees that may be called by the client under certain events. To the extent these letters of credit are called by the client, we would be required to use available cash to repay our lenders and could also be required to cash collateralize the remaining balance of outstanding letters of credit. Any of these events could result in material changes to the estimated revenue, costs and profits at completion on the project and adversely affect our financial condition, results of operations and cash flows.
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Dependence on third-party subcontractors and equipment manufacturers could adversely affect our profits.
We rely on third-party subcontractors and equipment manufacturers in order to complete many of our projects. Certain subcontractors and suppliers, such as those used on our U.S. government contracts, are subject to the same rigorous government requirements that we are and if they are unable to comply with these requirements, there may be limited subcontractors and suppliers available in the market. In addition, if any subcontractor or a manufacturer is unable to deliver its services, equipment or materials according to the negotiated terms for any reason including, but not limited to, the deterioration of its financial condition, we may be required to purchase the services, equipment or materials from another source at a higher price. This may reduce the profit we expect to realize or result in a loss on a project for which the services, equipment or materials were needed. Furthermore, if the amount we are required to pay for these goods and services exceeds the amount we have estimated in bidding for fixed-price contracts, we could experience losses in the performance of these contracts.
Some of our U.S. government work requires KBR and certain of its employees to qualify for and retain a government-issued security clearance. If we are unable to hire or retain employees with adequate security clearances, we may be unable to perform our obligations to customers.
We currently hold U.S. government-issued facility security clearances and a large number of our employees have qualified for and hold U.S. government-issued personal security clearances necessary to qualify for and ultimately perform certain U.S. government contracts. Obtaining and maintaining security clearances for employees involves lengthy processes, and it is difficult to identify, recruit and retain employees who already hold security clearances. If our employees are unable to obtain or retain security clearances or if our employees who hold security clearances terminate employment with us and we are unable to find replacements with equivalent security clearances, we may be unable to perform our obligations to customers whose work requires cleared employees, or such customers could terminate their contracts or decide not to renew them upon their expiration. Our facility security clearances could be marked as "invalid" for several reasons including unapproved foreign ownership, control or influence, mishandling of classified materials, or failure to properly report required activities. An inability to obtain or retain our facility security clearances or engage employees with the required security clearances for a particular contract could disqualify us from bidding for and winning new contracts with security requirements as well as result in the termination of any existing contracts requiring such clearances.
Our use of the cost-to-cost method of revenue recognition could result in a reduction or reversal of previously recorded revenues and profits.
A significant portion of our revenues and profits are measured and recognized over time using the cost-to-cost method of revenue recognition. Our use of this accounting method results in recognition of revenues and profits over the life of a contract, based generally on the proportion of costs incurred to date to total costs expected to be incurred for the entire project. The effects of revisions to estimated revenues and costs are recorded when the amounts are known or can be reasonably estimated. In addition, we have recorded significant unapproved change orders and claims against clients as well as estimated recoveries of claims against suppliers and subcontractors that have been included in the estimated profit at completion for certain projects. Revisions to these estimates could occur in any period and their effects could be material. The uncertainties inherent in estimating the progress towards completion or the recoverability of claims of long-term contracts make it possible for actual revenues and costs to vary materially from our estimates, including reductions or reversals of previously recorded revenues and profits.
We conduct a portion of our operations through joint ventures and partnerships, exposing us to risks and uncertainties, many of which are outside of our control.
We conduct a portion of our operations through project-specific joint ventures where control may be shared with unaffiliated third parties. As with any joint venture arrangement, differences in views among the joint venture partners may result in delayed decisions or in failures to agree on major issues. We also cannot control the actions of our joint venture partners, including failure to comply with applicable laws or regulations, nonperformance, default or bankruptcy of our joint venture partners. Also, we often share liabilities on a joint and several basis with our joint venture partners under these arrangements. If our partners do not meet their contractual obligations, the joint venture may be unable to adequately perform and deliver its contracted services, requiring us to make additional investments or perform additional services to ensure the adequate performance and delivery of services to the customer, which could ultimately result in litigation. We could be liable for both our obligations and those of our partners, which may result in reduced profits, significant losses on the project, and a negative impact to our cash flows. Additionally, these factors could have a material adverse effect on the business operations of the joint venture and, in turn, our business operations and reputation.
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Operating through joint ventures in which we have a minority interest could result in us having limited control over many decisions made with respect to projects and internal controls relating to projects. These joint ventures may not be subject to the same requirements regarding internal controls that are applicable to us. As a result, internal control issues may arise, which could have a material adverse effect on our financial condition and results of operations.
The nature of our contracts, particularly those that are fixed-price, subjects us to risks associated with cost overruns, operating cost inflation and potential claims for liquidated damages.
We conduct our business under various types of contracts where costs must be estimated in advance of our performance. A portion of the value of our current backlog is attributable to fixed-price contracts where we bear a significant portion of the risk of cost overruns. These types of contracts are priced, in part, on cost and scheduling estimates that are based on assumptions including prices and availability of experienced labor, equipment and materials as well as productivity, performance and future economic conditions. If these estimates prove inaccurate, if there are errors or ambiguities as to contract specifications or if circumstances change due to, among other things, unanticipated technical problems, poor project execution, difficulties in obtaining permits or approvals, changes in local laws or labor conditions, weather delays, changes in the costs of equipment and materials or our suppliers’ or subcontractors’ inability to perform, then cost overruns may occur. We may not be able to obtain compensation for additional work performed or expenses incurred. Additionally, we may be required to pay liquidated damages upon our failure to meet schedule or performance requirements of our contracts. Our failure to accurately estimate the resources and time required for fixed-price contracts or our failure to complete our contractual obligations within a specified time frame or cost estimate could result in reduced profits or, in certain cases, a loss for that contract. If the contract is significant, or we encounter issues that impact multiple contracts, cost overruns could have a material adverse effect on our business, financial condition and results of operations.
See Note 6 to our consolidated financial statements and risk factor under "The nature of our legacy business exposes us to potential liability claims and contract disputes that may exceed or be excluded from existing insurance coverage" for further discussion regarding cost increases and related unapproved change orders and claims on the Ichthys LNG Project.
Our U.S. government contract work is regularly reviewed and audited by our customer, U.S. government auditors and others, and these reviews can lead to withholding or delay of payments to us, non-receipt of award fees, legal actions, fines, penalties and liabilities and other remedies against us.
U.S. government contracts are subject to specific regulations such as the FAR, the Truth in Negotiations Act, CAS, the Service Contract Act and DoD security regulations. Failure to comply with any of these regulations, requirements or statutes may result in contract price adjustments, financial penalties or contract termination. Our U.S. government contracts are subject to audits, cost reviews and investigations by U.S. government contracting oversight agencies such as the DCAA. The DCAA reviews the adequacy of, and our compliance with, our internal control systems and policies, including our labor, billing, accounting, purchasing, property, estimating, compensation and management information systems. The DCAA has the authority to conduct audits and reviews to determine if we are complying with the requirements under the FAR and CAS, pertaining to the allocation, period assignment and allowability of costs assigned to U.S. government contracts. The DCAA presents its report findings to the DCMA. Should the DCMA determine that we have not complied with the terms of our contract or applicable statutes and regulations, payments to us may be disallowed, which could result in adjustments to previously reported revenues and refunding of previously collected cash proceeds. Additionally, we may be subject to qui tam litigation brought by private individuals on behalf of the U.S. government under the Federal False Claims Act, which could include claims for treble damages. These suits may remain under seal (and hence, be unknown to us) for some time while the U.S. government decides whether to intervene on behalf of the qui tam plaintiff.
Given the demands of working for the U.S. government, we may have disagreements or experience performance issues. When performance issues arise under any of our U.S. government contracts, the U.S. government retains the right to pursue remedies, which could include termination under any affected contract. If any contract were so terminated, our ability to secure future contracts could be adversely affected. Other remedies that could be sought by our U.S. government customers for any improper activities or performance issues include sanctions such as forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with the U.S. government. Further, the negative publicity that could arise from disagreements with our customers or sanctions as a result thereof could have an adverse effect on our reputation in the industry, reduce our ability to compete for new contracts and may also have a material adverse effect on our business, financial condition, results of operations and cash flows.
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The transition period resulting from the Referendum of the United Kingdom's Membership of the European Union could adversely affect our business and results of operations.
The U.K. formally exited the European Union (“Brexit”) on January 31, 2020, followed by a transition period from February through December 2020, during which the U.K. continued to remain in the European Union as it negotiated separate trade deals with the European Union and other countries. The effects of Brexit will depend on any agreements the U.K. makes to retain access to European Union markets. On December 24, 2020, the U.K. announced that it had reached agreement on a draft EU-UK Trade and Cooperation Agreement (“TCA”) covering trade in goods and in services, digital trade, intellectual property, public procurement aviation and road transport, energy, fisheries, social security coordination, law enforcement and judicial cooperation in criminal matters, thematic cooperation and participation in the European Union programs. The U.K. Parliament ratified the U.K.’s entry into, and implementation of, the TCA on December 30, 2020 pursuant to the EU (Future Relationship) Act 2020. Brexit could adversely affect U.K., European and worldwide economic and market conditions, could contribute to instability in some global financial and foreign exchange markets, including continued volatility in the value of the British pound sterling or could otherwise adversely affect trading agreements or similar cross-border cooperation arrangements (whether economic, tax, legal, regulatory or otherwise) beyond the date of Brexit. Volatility in currency exchange rates primarily impacts the translation of the financial results of the U.K. portion of our GS business segment. Brexit could also disrupt the free movement of goods, services and people between the U.K. and the European Union, and result in increased legal and regulatory complexities, as well as potential higher costs of conducting business in Europe. These developments, or the perception that any of them could occur, may adversely affect our relationships with our existing and future customers, suppliers, employees, and subcontractors, or otherwise have an adverse impact on our business, financial condition and results of operations.
We work in international locations where there are high security risks, which could result in harm to our employees and contractors or substantial costs.
Some of our services are performed in high-risk locations, including but not limited to, Iraq, Afghanistan and certain parts of Africa and the Middle East, where the country or surrounding area is suffering from political, social or economic issues, war or civil unrest. In those locations where we have employees or operations, we may incur substantial costs to maintain the safety of our personnel. Despite these precautions, we have suffered the loss of employees and contractors in the past that resulted in claims and litigation. Furthermore, there is risk of mass casualty or environmentally damaging events that may involve our and third party personnel and property, which could lead to future claims and litigation, impact our reputation and investor confidence, and ultimately result in reduced share price.
Demand for our services provided under government contracts are directly affected by spending by our customers.
We derive a portion of our revenues from contracts with agencies and departments of the U.S., U.K. and Australia governments, which is directly affected by changes in government spending and availability of adequate funding. Additionally, government regulations generally include the right for government agencies to modify, delay, curtail, renegotiate or terminate contracts at their convenience any time prior to their completion. As a significant government contractor, our financial performance is affected by the allocation and prioritization of government spending. Factors that could affect current and future government spending include:
•policy or spending changes implemented by the current administration, defense department or other government agencies;
•failure to pass budget appropriations, continuing funding resolutions or other budgetary decisions;
•changes, delays or cancellations of government programs or requirements;
•adoption of new laws or regulations that affect companies providing services to the governments;
•curtailment of the governments’ outsourcing of services to private contractors; or
•the level of political instability due to war, conflict or natural disasters.
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We face uncertainty with respect to our government contracts due to the fiscal, economic and budgetary challenges facing our customers. Potential contract delays, modifications or terminations may arise from resolution of these issues and could cause our revenues, profits and cash flows to be lower than our current projections. The loss of work we perform for governments or decreases in governmental spending and outsourcing could have a material adverse effect on our business, results of operations and cash flows.
Our backlog of unfilled orders is subject to unexpected adjustments and cancellations and, therefore, may not be a reliable indicator of our future revenues or earnings.
As of December 31, 2020, the future revenues we expect to realize as a result of backlog was approximately $15.1 billion. We cannot guarantee that the revenues projected in our backlog will be realized or that the projects will be profitable. Many of our contracts are subject to cancellation, termination or suspension at the discretion of the customer. From time to time, changes in project scope may occur with respect to contracts reflected in our backlog and could reduce the dollar amount of our backlog or the timing of the revenues and profits that we ultimately earn. Projects may remain in our backlog for an extended period of time because of the nature of the project and the timing of the particular services or equipment required by the project. Delays, suspensions, cancellations, payment defaults, scope changes and poor project execution could materially reduce or eliminate profits that we actually realize from projects in backlog. We cannot predict the impact that future economic conditions may have on our backlog, which could include a diminished ability to replace backlog once projects are completed or could result in the termination, modification or suspension of projects currently in our backlog. Such developments could have a material adverse effect on our financial condition, results of operations and cash flows.
Our business strategy includes the consideration of business acquisitions, which may present certain risks and uncertainties.
We may seek business acquisitions as a means of broadening our offerings and capturing additional market opportunities by our business segments and we may be exposed to certain additional risks resulting from these activities. These risks include, but are not limited to the following:
•valuation methodologies may not accurately capture the value proposition;
•future completed acquisitions may not be effectively integrated within our operations, resulting in a potentially significant detriment to the associated product/service line financial results and posing additional risks to our operations as a whole;
•we may have difficulty managing our growth or we may not achieve the expected growth from acquisition activities;
•key personnel within an acquired organization may resign from their related positions resulting in a significant loss to our strategic and operational efficiency associated with the acquired company;
•the effectiveness of our daily operations may be reduced by the redirection of employees and other resources to acquisition activities;
•we may assume liabilities of an acquired business (e.g. litigation, tax liabilities, contingent liabilities, environmental issues), including liabilities that were unknown at the time of the acquisition, that pose future risks to our working capital needs, cash flows and the profitability of related operations;
•we may assume unprofitable projects that pose future risks to our working capital needs, cash flows and the profitability of related operations;
•business acquisitions may include substantial transactional costs to complete the acquisition that exceed the estimated financial and operational benefits; or
•future acquisitions may require us to obtain additional equity or debt financing, which may not be available on attractive terms, if at all.
We ship a significant amount of cargo using seagoing vessels, exposing us to certain maritime risks.
We execute different projects in remote locations around the world and procure equipment and materials on a global basis. Depending on the type of contract, location, nature of the work and the sourcing of equipment and materials, we may charter seagoing vessels under time and bareboat charter arrangements and assume certain risks typical of those agreements. Such risks may include damage to the ship, liability for cargo and liability that charterers and vessel operators have to third parties “at law.” In addition, we ship a significant amount of cargo and are subject to hazards of the shipping and transportation industry.
Risks Related to Financial Conditions and Markets
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Current or future economic conditions in the credit markets may negatively affect the ability to operate our or our customers’ businesses, finance working capital, implement our acquisition strategy and access our cash and short-term investments.
We finance our business using cash provided by operations, but also depend on the availability of credit, including letters of credit and surety bonds. Our ability to obtain capital or financing on satisfactory terms will depend in part upon prevailing market conditions as well as our operating results. The lack of adequate credit or funding or the unavailability of funding on terms satisfactory to us, could have a material adverse effect on our business and financial performance.
Disruptions of the capital markets could also adversely affect our clients’ ability to finance projects and could result in contract cancellations or suspensions, project delays and payment delays or defaults by our clients. In addition, clients may be unable to fund new projects, may choose to make fewer capital expenditures or otherwise slow their spending on our services or to seek contract terms more favorable to them. Our government clients may face budget deficits that prohibit them from funding proposed and existing projects or that cause them to exercise their right to terminate our contracts with little or no prior notice. Furthermore, any financial difficulties suffered by our subcontractors or suppliers could increase our cost or adversely impact project schedules. These disruptions could materially impact our backlog and financial performance.
In addition, we are subject to the risk that the counterparties to our Revolver may be unable to meet their contractual obligations to us if they suffer catastrophic demands on their liquidity. We also routinely enter into contracts with counterparties, including vendors, suppliers and subcontractors that may be negatively affected by events in the capital markets. If those counterparties are unable to perform their obligations to us or our clients, we may be required to provide additional services or make alternate arrangements on less favorable terms with other parties to ensure adequate performance and delivery of service to our clients. These circumstances could also lead to disputes and litigation with our partners or clients, which could have a material adverse effect on our reputation, business, financial condition and results of operations.
Furthermore, our cash balances and short-term investments are maintained in accounts held at major banks and financial institutions located primarily in North America, the U.K. and Australia. Deposits are in amounts that exceed available insurance. Although none of the financial institutions in which we hold our cash and investments have gone into bankruptcy, been forced into receivership or have been seized by their governments, there is a risk that this may occur in the future. If this were to occur, we would be at risk of not being able to access our cash and investments, which may result in a temporary decrease in liquidity that could impede our ability to fund operations.
We may be unable to obtain new contract awards if we are unable to provide our customers with letters of credit, surety bonds or other credit enhancements.
Customers may require us to provide credit enhancements, including letters of credit, bank guarantees or surety bonds. We are often required to provide performance guarantees to customers to indemnify the customer should we fail to perform our obligations under the contract. Failure to provide the required credit enhancements on terms required by a customer may result in an inability to bid, win or comply with the contract. Historically, we have had adequate letters of credit capacity but such capacity beyond our Senior Credit Facility is generally at the provider’s sole discretion. Due to events that affect the banking and insurance markets generally, letters of credit or surety bonds may be difficult to obtain or may only be available at significant cost. Moreover, many projects are often very large and complex, which often necessitates the use of a joint venture, often with a market competitor, to bid on and perform the contract. Entering into joint ventures or partnerships exposes us to the credit and performance risk of third parties, many of whom may not be financially strong or may encounter financial difficulties. If our joint ventures or partners fail to perform, we may be required to complete the project activities. In addition, future projects may require us to obtain letters of credit that extend beyond the term of our Senior Credit Facility. Any inability to bid for or win new contracts due to the failure of obtaining adequate letters of credit, surety bonding or other customary credit enhancements could have a material adverse effect on our business prospects and future revenues.
Our Senior Credit Facility imposes restrictions that limit our operating flexibility and may result in additional expenses, and such facility may not be available if financial covenants are violated or if an event of default occurs.
Our Senior Credit Facility includes a $1 billion revolving credit facility which matures in February 2025. It contains a number of covenants restricting, among other things, our ability to incur liens and indebtedness, sell assets, repurchase our equity shares and make certain types of investments. We are also subject to certain financial covenants, including maintenance of a maximum consolidated leverage ratio and a consolidated interest coverage ratio as defined in the Senior Credit Facility agreement.
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A breach of any covenant or our inability to comply with the required financial ratios could result in a default under our Senior Credit Facility, and we can provide no assurance that we will be able to obtain the necessary waivers or amendments from our lenders to remedy a default. In the event of any default not cured or waived, the lenders are not obligated to provide funding or issue letters of credit and could elect to require us to apply available cash to collateralize any outstanding letters of credit and declare any outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable, thus requiring us to apply available cash to repay any borrowings then outstanding. If we are unable to cash collateralize our letters of credit or repay borrowings with respect to our Senior Credit Facility when due, our lenders could proceed against the guarantees of our major domestic subsidiaries. If any future indebtedness under our Senior Credit Facility is accelerated, we can provide no assurance that our assets would be sufficient to repay such indebtedness in full.
LIBOR is expected to no longer be available after June 30, 2023 for the primary U.S. dollar LIBOR settings used by the Company. As a result, there have been significant efforts by market participants and government and regulatory bodies in the United States and abroad to identify suitable replacement rates and develop processes for migration to the use of the alternatives. Our Senior Credit Facility gives us the option to use LIBOR as a funding benchmark and our interest rate swaps are based on the one-month U.S. dollar LIBOR. Our Senior Credit Facility allows us and the administrative agent to replace LIBOR with an alternative benchmark rate, subject to the right of the majority of the lenders to object thereto, as set forth in the credit facility. The International Swaps and Derivatives Association has issued terms that can be applied to determine the alternative reference rates under swap transactions and the timing of the switch to such alternatives. Any discontinuation of LIBOR and use of an alternative benchmark rate under our credit facility or our interest rate swap transactions is expected to be accompanied by a spread adjustment. The implementation of such alternative reference rates and spread adjustments could cause our funding costs to increase, including if there arises a differential between the alternative reference rate and/or spread adjustment under our credit facility and the alternative reference rate and/or spread adjustment applicable to our interest rate hedges.
Our indebtedness and the associated covenants could materially adversely affect our ability to obtain additional financing, including for acquisitions and capital expenditures, limit our flexibility to manage our business, prevent us from fulfilling our financial obligations and restrict our use of capital.
We had approximately $1.6 billion of indebtedness outstanding as of December 31, 2020 which could have negative consequences to us, including, but not limited to:
•requiring us to dedicate cash flow from operations to the repayment of debt, interest and other related amounts, which reduces the funds we have available for other purposes, such as working capital, capital expenditures, acquisitions, payment of dividends and share repurchase programs;
•making it more difficult or expensive for us to obtain any necessary future financing for working capital, capital expenditures, debt service requirements, debt refinancing, acquisitions or other purposes;
•reducing our flexibility in planning for or reacting to changes in our industry and market conditions;
•causing us to be more vulnerable in the event of a downturn in our business;
•exposing us to increased interest rate risk given that a portion of our debt obligations are at variable interest rates; and
•increasing our risk of a covenant violation under our Senior Credit Facility.
We may be required to contribute additional cash to meet our significant underfunded benefit obligations associated with pension benefit plans we manage.
We have frozen defined benefit pension plans for employees primarily in the U.S., U.K., and Germany. At December 31, 2020, our defined benefit pension plans had an aggregate funding deficit (calculated as the excess of projected benefit obligations over the fair value of plan assets) of approximately $381 million, the majority of which is related to our defined benefit pension plan in the U.K. In the future, our pension deficits may increase or decrease depending on changes in the levels of interest rates, pension plan performance and other factors that may require us to make additional cash contributions to our pension plans and recognize further increases in our net pension cost to satisfy our funding requirements. If we are required or elect to make up all or a significant portion of the deficit for underfunded benefit plans, our financial position could be materially and adversely affected.
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Our U.K. defined benefit pension plan has an aggregate funding deficit. Our U.K. pension plan has been frozen to new participants for a number of years, but can still have an aggregate funding deficit due to assumptions and factors noted below. For our frozen defined benefit pension plan in the U.K., the annual minimum funding requirements are based on a binding agreement with the plan trustees that is negotiated on a triennial basis. This agreement also includes other assurances and commitments regarding the business and assets that support the U.K. pension plan. It is possible that, following future valuations of our U.K. pension plan assets and liabilities or following future discussions with the trustees, the annual funding obligation will change. The future valuations under our U.K. pension plan can be affected by a number of assumptions and factors, including legislative changes, assumptions regarding interest rates, inflation, mortality and retirement rates, the investment strategy and performance of the plan assets, and (in certain circumstance) actions by the U.K. pensions regulator. Adverse changes in the equity markets, interest rates, or changes in actuarial assumptions and legislative or other regulatory actions could increase the risk that the funding requirements increase following the next triennial negotiation. A significant increase in our funding requirements for our U.K. pension plan could result in a material adverse effect on our cash flows and financial position.
We are subject to foreign currency exchange risks that could adversely affect our operations and our ability to reinvest earnings from operations. Our ability to mitigate our foreign exchange risk through hedging transactions may be limited.
We generally attempt to denominate our contracts in U.S. Dollars or in the currencies of our costs. However, we enter into contracts that subject us to currency risk exposure, primarily when our contract revenues are denominated in a currency different from the contract costs. A portion of our consolidated revenues and consolidated operating expenses are in foreign currencies. As a result, we are subject to foreign currency risks, including risks resulting from changes in currency exchange rates and limitations on our ability to reinvest earnings from operations in one country to fund the financing requirements of our operations in other countries.
The governments of certain countries have or may in the future impose restrictive exchange controls on local currencies and it may not be possible for us to engage in effective hedging transactions to mitigate the risks associated with fluctuations of a particular currency. We are often required to pay all or a portion of our costs associated with a project in the local currency. As a result, we generally attempt to negotiate contract terms with our customer, who is often affiliated with the local government, or has a significant local presence, to provide that we are only paid in the local currency for amounts that match our local expenses. If we are unable to match our local currency costs with revenues in the local currency, we would be exposed to the risk of adverse changes in currency exchange rates.
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If we need to sell or issue additional shares of common stock to refinance existing debt or to finance future acquisitions, our existing shareholder ownership could be diluted. In addition, the convertible note hedge and warrant transactions that we entered into in connection with the pricing of the Convertible Notes may affect the value of our common stock.
Part of our business strategy is to expand into new markets and enhance our position in existing markets, both domestically and internationally, which may include the acquisition and merging of complementary businesses. To successfully fund and complete such potential acquisitions, or to refinance our existing debt, we may issue additional equity securities that may result in dilution of our existing shareholder ownership's earnings per share.
In addition, in connection with the pricing of the Convertible Notes, we entered into convertible note hedge transactions with certain option counterparties. We also entered into warrant transactions with the option counterparties. The convertible note hedge transactions are generally expected to reduce potential dilution to our common stock upon any conversion of the Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Convertible Notes, as the case may be. However, the warrant transactions could separately have a dilutive effect to the extent that the market value per share of our common stock exceeds the strike price of the warrants at the time of exercise.
Provisions in our charter documents, Delaware law and our Senior Credit Facility may inhibit a takeover or impact operational control that could adversely affect the value of our common stock.
Our certificate of incorporation and bylaws, as well as Delaware corporate law, contain provisions that could delay or prevent a change of control or changes in our management that a stockholder might consider favorable. These provisions include, among others, prohibiting stockholder action by written consent, advance notice for making nominations at meetings of stockholders, providing for the state of Delaware as the exclusive forum for lawsuits concerning certain corporate matters and the issuance of preferred stock with rights that may be senior to those of our common stock without stockholder approval. These provisions would apply even if a takeover offer may be considered beneficial by some of our stockholders. If a change of control or change in management is delayed or prevented, the market price of our common stock could decline. Additionally, our Senior Credit Facility contains a default provision that is triggered upon a change in control of at least 25%, which would impede a takeover and/or make a takeover more costly.
We make equity investments in privately financed projects in which we could sustain significant losses.
We participate in privately financed projects that enable governments and other customers to finance large-scale projects, such as the acquisition and maintenance of major military equipment, capital projects and service purchases. These projects typically include the facilitation of nonrecourse financing, the design and construction of facilities and the provision of operation and maintenance services for an agreed-upon period after the facilities have been completed. We may incur contractually reimbursable costs, and typically make investments prior to an entity achieving operational status or receiving project financing. If a project is unable to obtain financing, we could incur losses on our investments and any related contractual receivables. After completion of these projects, the return on our investments can be dependent on the operational success of the project and market factors that may not be under our control. As a result, we could sustain a loss on our equity investment in these projects.
Risks Related to Regulations and Law
We could be adversely impacted if we fail to comply with international export and domestic laws, which are rigorously enforced by the U.S. government.
To the extent that we export products, technical data and services outside of the U.S., we are subject to laws and regulations governing trade and exports, including, but not limited to, the International Traffic in Arms Regulations, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Asset Control within the Department of the Treasury. A failure to comply with these laws and regulations could result in civil or criminal sanctions, including the imposition of fines as well as the denial of export privileges and debarment from participation in U.S. government contracts. U.S. government contract violations could result in the imposition of civil and criminal penalties or sanctions, contract termination, forfeiture of profit or suspension of payment, any of which could result in losing our status as an eligible U.S. government contractor and cause us to suffer serious reputational harm, and which could have a material adverse effect on our business, financial condition or results of operations.
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We are subject to anti-bribery laws in the U.S. and other jurisdictions, violations of which could include suspension or debarment of our ability to contract with the U.S. state or local governments, U.S. government agencies or the U.K. MoD, third-party claims, loss of customers, adverse financial impact, damage to reputation and adverse consequences on financing for current or future projects.
The FCPA, the U.K. Bribery Act and similar anti-bribery laws ("Anti-bribery Laws") in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these Anti-bribery Laws. We operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with Anti-bribery Laws may conflict with local customs and practices. We train our staff concerning Anti-bribery Laws and we also inform our partners, subcontractors, agents and other third parties who work for us or on our behalf that they must comply with the requirements of these Anti-bribery Laws. We also have procedures and controls in place to monitor internal and external compliance. We cannot provide complete assurance that our internal controls and procedures will always protect us from the reckless or criminal acts committed by our employees or third parties working on our behalf. If we are found to be liable for violations of these laws (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), we could suffer from criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.
Certain of our work sites are inherently dangerous and we are subject to various environmental and worker health and safety laws and regulations. If we fail to maintain safe work sites or to comply with these laws and regulations, we may suffer damage to our reputation and incur significant costs and penalties that could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Certain work sites often expose our employees and others to chemical and manufacturing processes, large pieces of mechanized equipment, and moving vehicles. Additionally, our employees and others at certain project sites may be exposed to severe weather events or high security risks. Failure to implement effective safety procedures may result in injury, disability or loss of life to these parties. In addition, the projects may be delayed and we may be exposed to litigation or investigations.
Our operations are subject to a variety of environmental, worker health and safety laws and regulations governing the generation, management and use of regulated materials, the discharge of materials into the environment, the remediation of environmental contamination associated with the release of hazardous substances and human health and safety. Violations of these laws and regulations can cause significant delays and additional costs to a project. When we perform our services, our personnel and equipment may be exposed to radioactive and hazardous materials and conditions. We may be subject to claims alleging personal injury, property damage or natural resource damages by employees, customers and third parties as a result of alleged exposure to or contamination by hazardous substances. In addition, we may be subject to fines, penalties or other liabilities arising under environmental and employee safety laws. A claim, if not covered by insurance at all or only partially, could have a material adverse impact on our financial condition, results of operations and cash flows. In addition, more stringent regulation of our customers' operations with respect to the protection of the environment could also adversely affect their operations and reduce demand for our services.
Various U.S. federal, state and local as well as foreign environmental laws and regulations may impose liability for property damage and costs of investigation and cleanup of hazardous or toxic substances on property currently or previously owned by us or arising out of our waste management or environmental remediation activities. These laws may impose responsibility and liability without regard to knowledge or causation of the presence of contaminants. The liability under these laws may be joint and several. The ongoing costs of complying with existing environmental laws and regulations could be substantial and have a material adverse impact on our financial condition, results of operations and cash flows. Changes in the environmental laws and regulations, remediation obligations, enforcement actions, stricter interpretations of existing requirements, future discovery of contamination or claims for damages to persons, property, natural resources or the environment could result in material costs and liabilities that we currently do not anticipate.
There is a rapidly evolving awareness and focus from stakeholders, such as investors, customers, current and future employees, with respect to global climate change and related emphasis on environment, social, and governance practices, which could affect our business.
Continued attention to issues concerning climate change or other environmental matters (e.g., the use of commodity plastics) may result in the imposition of additional environmental regulations that seek to restrict, or otherwise impose limitations or costs upon, the emission of greenhouse gases. International agreements and national, regional and state legislation and regulatory measures or other restrictions on emissions of greenhouse gases could affect our clients, including those who are involved in the exploration, production or refining of fossil fuels, emit greenhouse gases through the combustion of fossil fuels, or through mining, manufacture, utilization or production of materials or goods. Such legislation or restrictions
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could increase the costs of projects for us and our clients or, in some cases, prevent a project from going forward, thereby potentially reducing the need for our services that could in turn have a material adverse effect on our operations and financial condition. We cannot predict when or whether any of these various legislative and regulatory proposals may become law or what their effect will be on us and our customers.
Furthermore, investor and societal expectations with respect to environmental, social, and governance matters have been rapidly evolving and increasing. We risk damage to our reputation if we do not act responsibly in the following key areas: diversity and inclusion, environmental stewardship, support for local communities, and corporate governance and transparency. A failure to adequately meet stakeholders' expectations may result in loss of business, diluted market valuation, an inability to attract and retain customers and talented personnel, increased negative investor sentiment toward us and/or our customers, and the diversion of investment to other industries, which could have a negative impact on our stock price and our access to and costs of capital.
General Risk Factors
Intense competition could reduce our market share and profits.
We serve markets that are global and highly competitive and in which a large number of multinational companies compete. These highly competitive markets require substantial resources and capital investment in equipment, technology and skilled personnel. Our projects are frequently awarded through a competitive bidding process, which is standard in the industries in which we compete. We are constantly competing for project awards based on pricing, schedule and the breadth and technical sophistication of our services. Any increase in competition or reduction in our competitive capabilities could have a material adverse effect on the margins we generate from our projects as well as our ability to maintain or increase market share.
International and political events may adversely affect our operations.
A portion of our revenues is derived from foreign operations, which exposes us to risks inherent in doing business in each of the countries where we transact business. The occurrence of any of the risks described below could have a material adverse effect on our business operations and financial performance. With respect to any particular country, these risks may include, but not be limited to:
•expropriation and nationalization of our assets in that country;
•political and economic instability;
•civil unrest, acts of terrorism, war or other armed conflict;
•currency fluctuations, devaluations and conversion restrictions;
•confiscatory taxation or other adverse tax policies;
•governmental activities or judicial actions that limit or disrupt markets, restrict payments, limit the movement of funds, result in the deprivation of contract rights or result in the inability for us to obtain or retain licenses required for operation; or
•increased polarization of political parties, in the U.S. and abroad, which may lead to more volatility in government spending or other developments such as trade wars or changes in military priorities.
Due to the unsettled political conditions in countries where we provide governmental logistical support, our financial performance is subject to the adverse consequences of war, the effects of terrorism, civil unrest, strikes, currency controls and governmental actions. Our operations are conducted in areas that have significant political risk. In addition, military action or unrest could disrupt our operations in such locations and elsewhere and increase our costs related to security worldwide.
We rely on information technology ("IT") systems to conduct our business, and disruption, failure or security breaches of these systems could adversely affect our business and results of operations.
We utilize, develop, install and maintain a number of information technology systems both for us and for our customers. These activities may involve substantial risks to our ongoing business processes including, but not limited to, accurate and timely customer invoicing, employee payroll processing, vendor payment processing and financial reporting. If these implementation activities are not executed successfully or if we encounter significant delays in our implementation efforts, we could experience interruptions to our business processes. Under certain contracts with the U.S. government subject to the FAR and CAS, the adequacy of our business processes and related systems could be called into question. Such events could have a material adverse impact on our business, financial condition, results of operations and cash flows.
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Various privacy and security laws require us to protect sensitive and confidential information from disclosure. In addition, we are bound by our client and other contracts, as well as our own business practices, to protect our and certain third party confidential and proprietary information from disclosure. We rely upon industry accepted security measures and technology to secure such confidential and proprietary information maintained on our IT systems. However, our portfolio of hardware and software products, solutions and services and information contained within our enterprise IT systems may be vulnerable to damage or disruption caused by circumstances beyond our control such as catastrophic events, cyberattacks, other malicious and non-malicious activities from authorized and unauthorized employees or third parties, power outages, natural disasters, computer system or network failures, or computer viruses. The failure of our IT systems to perform as anticipated for any reason could disrupt our business and result in decreased performance, significant remediation costs, transaction errors, loss of data (e.g., personally identifiable information), processing inefficiencies, downtime, litigation and the loss of suppliers or customers. Any significant disruptions or failures could damage our reputation or have a material adverse effect on our business operations, financial performance and financial condition.
An impairment of all or part of our goodwill or our intangible assets could have a material adverse impact on our net earnings and net worth.
As of December 31, 2020, we had $1.8 billion of goodwill and $683 million of intangible assets recorded on our consolidated balance sheets. Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. We perform an annual analysis of our goodwill on October 1 to determine if it has become impaired. We perform an interim analysis to determine if our goodwill has become impaired if events occur or circumstances change that would more likely than not reduce our enterprise fair value below its book value. These events or circumstances could include a significant change in the business climate, including a significant sustained decline in a reporting unit’s market value, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of our business, potential government actions toward our facilities and various other factors. If the fair value of a reporting unit is less than its carrying value, we could be required to record an impairment charge. An impairment of all or a part of our goodwill or intangible assets could have a material adverse effect on our net earnings and net worth. For example, we recorded impairment charges for goodwill and intangible assets totaling $110 million for the year ended December 31, 2020, as a result of the economic and market volatility as well as management's decision to discontinue pursuing certain projects in our ES business segment. For a further discussion of goodwill and intangible assets, see "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, " Note 7 and Note 9 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
Our effective tax rate and tax positions may vary.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and a change in tax laws, treaties or regulations, or their interpretation, in any country in which we operate could result in higher taxes on our earnings, which could have a material impact on our earnings and cash flows from operations. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are audited by various U.S. and foreign tax authorities in the ordinary course of business, and our tax estimates and tax positions could be materially affected by many factors including the final outcome of tax audits and related litigation, the introduction of new tax accounting standards, legislation, regulations and related interpretations, our global mix of earnings, the realizability of deferred tax assets and changes in uncertain tax positions. A significant increase in tax rates could have a material adverse effect on our profitability and liquidity.
We may change our dividend policy in the future.
We have maintained a regular cash dividend program since 2007. We anticipate continuing to pay quarterly dividends during 2021. However, any future payment of dividends, including the timing and amount of any such dividends, is at the discretion of our Board of Directors and may depend upon our earnings, liquidity, financial condition, alternate capital deployment opportunities or any other factors that our Board of Directors considers relevant. A change in our regular cash dividend program could have an adverse effect on the market price of our common stock.
Item 1B. Unresolved Staff Comments
None.
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Item 2.Properties
Our operations are conducted at both owned and leased properties in domestic and foreign locations. Our corporate headquarters are located at 601 Jefferson Street, Houston, Texas. While we have operations worldwide, the following table describes the locations of our more significant existing office facilities:
Location Owned/Leased Business Segment
North America:
Houston, Texas Leased All
Fulton, Maryland Leased Government Solutions
Columbia, Maryland Leased Government Solutions
Greenbelt, Maryland Leased Government Solutions
Lexington Park, Maryland Leased Government Solutions
Chantilly, Virginia Leased Government Solutions
Vienna, Virginia Leased Government Solutions
Fairfax, Virginia Leased Government Solutions
Dayton/Beavercreek, Ohio Leased Government Solutions
Huntsville, Alabama Leased Government Solutions
Phoenix, Arizona Leased Government Solutions
Colorado Springs, Colorado Leased Government Solutions
Europe, Middle East and Africa:
Leatherhead, United Kingdom Owned All
Wiltshire, United Kingdom Leased / Owned Government Solutions
Al Khobar, Saudi Arabia Leased Energy Solutions
Asia-Pacific:
Chennai, India Leased All
Majura Park, Australia Leased Government Solutions
Parkside, Australia Leased Government Solutions
Delhi (Gurgaon), India Leased Technology Solutions
Beijing, China Leased Technology Solutions
Perth, Australia Leased Energy Solutions
Brisbane, Australia Leased Energy Solutions
Sydney, Australia Leased Energy Solutions
Melbourne, Australia Leased Energy Solutions
We also own or lease numerous small facilities that include sales, administrative and offices as well as warehouses and equipment yards located throughout the world. Our owned Leatherhead property is pledged to secure certain pension obligations in the U.K. and we believe all properties that we currently occupy are suitable for their intended use.
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Item 3.Legal Proceedings
Information relating to various commitments and contingencies is described in “Item 1A. Risk Factors” contained in Part I of this Annual Report on Form 10-K and in Notes 15 and 16 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part I, Item 3.
Item 4.Mine Safety Disclosures
Not applicable.
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PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the NYSE and trades under the symbol “KBR.” On February 20, 2020, our Board of Directors declared a regular quarterly cash dividend of $0.10 per common share. Future dividend declarations will be at the discretion of our Board of Directors.
At January 31, 2021, there were 69 shareholders of record. In calculating the number of shareholders, we consider clearing agencies and security position listings as one shareholder for each agency or listing.
Share Repurchases
On February 25, 2014, our Board of Directors authorized a $350 million share repurchase program. As of December 31, 2019, $160 million remained available under this authorization. On February 19, 2020, our Board of Directors authorized an increase of approximately $190 million to our share repurchase program, returning the authorization level to $350 million. As of December 31, 2020, $303 million remains available for repurchase under this authorization. The authorization does not obligate the Company to acquire any particular number of shares of common stock and may be commenced, suspended or discontinued without prior notice. The share repurchases are intended to be funded through the Company’s current and future cash flows and the authorization does not have an expiration date.
The following is a summary of share repurchases of our common stock settled during the three months ended December 31, 2020, and the amount available to be repurchased under the authorized share repurchase program:
(1)Included within the shares repurchased herein are 3,625 shares acquired from employees in connection with the settlement of income tax and related benefit withholding obligations arising from issuance of share-based equity awards under the KBR Stock and Incentive Plan at an average price of $25.30 per share.
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Performance Graph
The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall the information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing.
The following performance graph compares the cumulative total shareholder return on shares of our common stock for the five-year period ended December 31, 2020, with the cumulative total return on the S&P 1500 IT Consulting & Other Services Index, the Russell 2000 Index, and the Dow Jones Heavy Construction Industry Index for the same period. The comparisons assume the investment of $100 on December 31, 2015 and reinvestment of all dividends. The shareholder return is not necessarily indicative of future performance.
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Item 6.Selected Financial Data
The following table presents selected financial data for the last five years and should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II of this Annual Report on Form 10-K and the consolidated financial statements and the related notes to the consolidated financial statements included in Part II, Item 8 in this Annual Report on Form 10-K.
Years Ended December 31,
Statements of Operations Data:
Equity in earnings of unconsolidated affiliates 30 35 79 70 82
Asset impairments and restructuring charges (214) — — (6) (39)
Net income attributable to noncontrolling interests (21) (7) (29) (8) (10)
Balance Sheet Data (as of the end of period):
Long-term nonrecourse project-finance debt 2 7 17 28 34
Other Financial Data (as of the end of period):
(a)Includes revenues related to the consolidation of the Aspire Defence contracting entities in January 2018 and the acquisition of SGT in April 2018 totaling $1.0 billion and $875 million for the years ended 2019 and 2018, respectively. See Note 4 to our consolidated financial statements.
(b)Includes gain on consolidation of the Aspire subcontracting entities of $108 million for the year ended 2018. See Note 4 to our consolidated financial statements.
(c)Net income and Net income attributable to KBR in the fourth quarter of 2017 were favorably impacted by a release of a valuation allowance of $223 million and an $17 million favorable impact related to the Tax Act. See Note 13 to our consolidated financial statements.
(d)Effective January 1, 2018, we adopted ASC Topic 606. For all periods ending prior to January 1, 2018, revenues were recognized under the guidance of ASC Topic 605. See Note 1 to our consolidated financial statements.
(e)Effective January 1, 2019, we reclassified $128 million, $97 million, and $86 million from "Cost of revenues" to "Selling, general and administrative expenses" for the years ended 2018, 2017 and 2016, respectively, to report in the same manner as such costs are defined in our disclosure statements under CAS for U.S. government reporting. See Note 1 to our consolidated financial statements.
(f)The impact of adopting ASU No. 2016-02, Leases (Topic 842) resulted in an increase in total assets of $177 million and an increase in total shareholders' equity of $21 million at January 1, 2019. See Note 1 to our consolidated financial statements.
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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The purpose of MD&A is to provide our stockholders and other interested parties with information necessary to gain an understanding of our financial condition and disclose changes in our financial condition since the most recent fiscal year-end and results of operations during the current fiscal period as compared to the corresponding period of the preceding fiscal year. The MD&A should be read in conjunction with Part I of this Annual Report on Form 10-K as well as the consolidated financial statements and related notes included in Part II Item 8 in this Annual Report on Form 10-K.
This MD&A does not address certain items in respect of the year ended December 31, 2018. A discussion and analysis of such period may be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 24, 2020.
Overview
KBR, a Delaware corporation, delivers scientific, technology and engineering solutions to governments and companies around the world. Drawing from its rich 100-year history and culture of innovation and mission focus, KBR creates sustainable value by combining scientific, technology and engineering expertise with its full life cycle capabilities to help our clients meet their most pressing challenges. Our capabilities and offerings include the following:
•Scientific research such as quantum science and computing; health and human performance; materials science; life science research; and earth sciences;
•Defense systems engineering such as rapid prototyping; test and evaluation; aerospace acquisition support; systems and platform integration; and sustainment engineering;
•Operational support such as space domain awareness; C4ISR; human spaceflight and satellite operations; integrated supply chain and logistics; and military aviation support; and
•Information operations such as cybersecurity; data analytics; mission planning systems; virtual/augmented reality and technical training; and artificial intelligence and machine learning; and
•Technology such as licensing of proprietary, sustainability-focused process technology; advisory services focused on energy transition; and digitally-enabled asset optimization solutions.
KBR's strategic growth vectors include:
•Defense modernization;
•Space superiority;
•Health and human performance; and
•Sustainable technology.
Our stated financial policies and deployment priorities are to fund organic growth, maintain responsible leverage, maintain an attractive dividend, make strategic acquisitions and repurchase shares. Our acquisition thesis is centered around moving upmarket, expanding capabilities and broadening customer sets in its strategic growth vectors.
On October 1, 2020, we acquired Centauri, a provider of high-end engineering and development solutions for critical, well-funded, national security missions associated with space, intelligence, cyber, and emerging technologies such as directed energy and missile defense. Additional information relating to the Centauri acquisition is described in Part II of this Annual Report on Form 10-K in Note 4 to our consolidated financial statements.
KBR delivers a wide range of professional services across defense, space and other government agencies spanning program management and consulting, mission planning, operational and platform support, research and development, test and evaluation, training, and logistics and facilities management. These services are provided primarily to government agencies in the U.S., U.K., Australia and other select countries under long-term programs with key technical, scientific or mission-specific differentiation. Key customers include U.S. DoD agencies such as the Missile Defense Agency, National Geospatial-Intelligence Agency, National Reconnaissance Office and other intelligence agencies, U.S. Army, U.S. Navy and U.S. Air Force; U.S. civilian agencies such as NASA, U.S. Geological Survey and National Oceanic and Atmospheric Administration; the U.K. Ministry of Defence, London Metropolitan Police, U.K. Army, other U.K. Crown Services; and the Royal Australian Air Force, Navy and Army.
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KBR develops and prioritizes investment in process technologies that are disruptive, innovative, and sustainability- and safety-focused. These technologies and solutions enable clients to achieve a cleaner, greener, more energy efficient global future. We deliver high-end advisory solutions centered around energy transition; we license process technologies; we provide engineering and design services; we sell proprietary equipment and catalysts; and we provide asset optimization and remote facility monitoring solutions. Key customers include national governments, commercial and industrial companies, and oil and gas companies.
Business Environment and Trends
Government Outlook
The fiscal year 2021 U.S. defense budget funds a national security strategy that continues the restoration of military readiness, furthers a national security strategy to confront near peer and other threats around the world, enhances the DoD’s cybersecurity strategy and cyber warfare capabilities, increases the priority of military space superiority, and directs innovation to meet long-range emerging threats. The budget includes a number of measures to strengthen emerging technologies including cyber-science and technologies, artificial intelligence, directed energy, hypersonics, and biotechnologies.
Internationally, our Government Solutions work is performed primarily for the U.K. Ministry of Defence and the Australian Department of Defence. A significant majority of our work in the U.K. is contracted through long-term privately financed initiatives (PFIs) that are expected to provide stable, predictable earnings and cash flow over the program life, with our largest PFI extending through 2041. The Australian government continues to increase defense spending, with particular focus on enhancing regional security, modernizing defense capabilities, strengthening cyber defenses and promoting broader economic stability.
With defense and civil budgets driven in part by political instability, military conflicts, aging platforms and infrastructure and the need for technology upgrades, we expect continued opportunities to provide solutions and technologies to mission critical work aligned with our customers’ priorities.
Commercial Outlook
Long-range commercial market fundamentals are supported by global population growth, global expansion of the middle class, and acceleration of demand for energy transition and renewable energy sources for which momentum continues, even amidst COVID-19.Clients continue to prioritize investment in solutions to increase end-product flexibility and energy efficiency and reduce their environmental footprint. As companies continue to commit to near-term carbon neutrality and longer-range net-zero carbon ambitions, we expect their spending to continue in areas such as decarbonization; carbon capture, sequestration and utilization; biofuels; and plastics circular economy.Further, governments and leading companies across the world are proactively evaluating clean energy alternatives, including hydrogen and green ammonia, which are areas that favor KBR’s world-class technology portfolio and expertise.
We expect climate change and energy transition to be increasing areas of priority and investment for the Biden Administration and a more progressive Senate that holds a thin margin, as the U.S. looks to reboot its economy and invest in a cleaner future. President Biden has nominated two new cabinet-level positions focused on climate change and science.Further, through executive action, President Biden has initiated re-entry into the Paris climate accords and has begun the reversal of a number of the prior administration’s environmental policies.
Our Business
KBR's business is organized into three core and two non-core business segments as follows:
Core business segments
•Government Solutions
•Technology Solutions
•Energy Solutions
Non-core business segments
•Non-strategic Business
•Other
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See additional information on our business segments, including detail with respect to changes to our reportable segments in Notes 1 and 2 to our consolidated financial statements and under "Item 1. Business" in this Annual Report on Form 10-K.
In 2020, we initiated a strategic transition from the current three-core business segment model to a two-core business segment model comprised of Government Solutions and Technology Solutions. We expect to begin reporting under this model in fiscal year 2021.The new Technology Solutions segment is anchored by our innovative, proprietary process technologies. It will also include our highly synergistic advisory practice focused on energy transition and net-zero carbon ambitions as well as the technology-led industrial solutions focused on innovative digital operations and maintenance ("O&M") solutions and advanced remote operations capabilities to improve throughput, reliability and environmental sustainability. Infusing high-end, sustainability expertise, client relationships and innovative, technology-led O&M solutions into Technology Solutions is expected to increase resilience, generate new opportunities, simplify the business model and better position us to deliver its offerings across a broader industrial base.
Effective for fiscal year 2021, we will change the names of our reportable segments and businesses as follows:
•Government Solutions includes the following four business units: Defense & Intel, formerly the Defense Systems Engineering and Centauri businesses; Science & Space, formerly called Space & Mission Solutions; Readiness & Sustainment, formerly called Logistics; and International.
•Sustainable Technology Solutions, formerly called Technology Solutions.
Overview of Financial Results
2020 was a year of significant achievement for KBR as we successfully advanced our long-term vision. We accelerated the Company’s growth into attractive markets with the Centauri acquisition and Technology portfolio realignment; focused on agile, technology-driven, sustainability-focused; knowledge-based delivery; and advanced our ESG and sustainability strategy by establishing 2030 net-zero carbon ambitions and achieving carbon neutrality in 2019. Our teams continued to execute and deliver operational performance, healthy profitability and strong cash flow. Importantly, we drove innovation and extended our footprint through new program wins and technology advances and development. Bookings to underpin the future were strong in our GS and TS businesses. Our U.S. Government Solutions business achieved a 95% recompete win rate that included a $400 million NASA recompete award to provide intelligent systems research and a $300 million U.S. Geological Survey recompete award to perform satellite systems engineering, software development, and scientific research and application development for remote sensing data. We also expanded our footprint through new projects and program wins, including a five-year contract for over $500 million for an undisclosed client to provide high-end technical services for rapid prototyping and fielding of advanced systems and an eight-year $974 million contract to provide the U.S. Air Force sustaining operations in Europe. We continued our track record of innovation, bringing new technologies to market and advising, consulting and delivering expertise in the vital area of energy transition, hydrogen future and plastics circular economy.
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Results of Operations
The following tables set forth our results of operations for the periods presented, including by segment.
Revenues
2020 vs. 2019
Revenue of $5.8 billion represented an increase of $128 million from the prior year, primarily due to the following: (1) new program wins and on-contract expansion, including approximately $104 million, or 12%, growth in Space & Mission Solutions; approximately $50 million growth in sustaining programs within Logistics; approximately $50 million, or 7%, growth in Defense & Intel; (2) Centauri, acquired on October 1, 2020, contributed approximately $125 million of revenue; and (3) ES business segment revenue volume increased approximately $187 million primarily attributable to completion of projects in backlog. Revenue increases were partially offset by approximately $150 million of revenue associated with disaster recovery services provided to the U.S. Air Force on the AFCAP IV project in 2019 that did not recur in 2020, reduced volume in the Company’s Middle East overseas contingency operations of approximately $150 million, and reduced activity in the Company’s international government business of approximately $25 million.
2019 vs. 2018
The increase in consolidated revenues in 2019 was primarily driven by strong organic growth within our GS business segment relative to the Logistics and Defense & Intel businesses as well as increased revenues from the acquisition of SGT in April 2018. New services and consulting awards in the Middle East from our ES business segment and higher proprietary equipment sales volume from our TS business segment also contributed significantly to revenue growth in 2019.
Gross Profit
2020 vs. 2019
The $13 million increase in gross profit is primarily driven by revenue growth described above as well as favorable changes in estimates on the Aspire Defence project.While revenue increased in our ES business segment, gross profit decreased primarily due to the volume of lower margin services as we complete projects in backlog and transition away from commoditized services.
2019 vs. 2018
The $69 million increase in gross profit in 2019 includes $80 million in increased gross profit from our GS business segment primarily driven by the volume growth in revenue, incremental profits resulting from the full year of operations from SGT, and favorable settlements on several legacy matters in our GS business segment including the private security legal matter. We also recognized incremental profits from construction services related to the Aspire Defence project in the U.K. associated with index-based price adjustments. TS business segment gross profit increased by $12 million over 2018 levels based on increased volumes of proprietary equipment sales. Additionally, we recognized increased earnings of $11 million primarily due to the close-out of a completed project in our Non-strategic business segment. These increases were partially offset by reductions in gross profit from our ES business segment of $34 million due to lower margins on several major EPC projects and the non-recurrence of several favorable items including the recognition of variable consideration associated with the successful completion of an LNG project in Australia in 2018.
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Equity in Earnings of Unconsolidated Affiliates
2020 vs. 2019
Equity earnings decreased was primarily noted in our ES business segment due to the successful completion of a North Sea project in 2019 in our ES business segment resulting in favorable benefits that did not recur in 2020 and reduced earnings from other joint ventures.
2019 vs. 2018
Equity earnings decreased was primarily noted in our ES business segment due to the substantial completion of a North Sea project in 2019 in our ES business segment that contributed significantly in 2018 and to a lesser extent in 2019.Further, in 2019, the Company recognized the impact of an unfavorable arbitration ruling associated with the Ichthys LNG project as well as an impairment of an equity method investment in Latin America. In 2018, we realized a benefit associated with the release of a tax matter on an Egyptian joint venture that did not recur in 2019.See Note 6 to our consolidated financial statements for more information on the Ichthys LNG project.
Selling, General and Administrative Expenses
2020 vs. 2019
Selling, general and administrative expenses were slightly lower in 2020 compared to 2019, primarily due to reductions in corporate costs associated with austerity measures and travel restrictions related to COVID-19.These reductions were partially offset by increases in our GS business segment, including increased amortization attributable to our acquisition of Centauri, increased bid and proposal cost and favorable variances in 2019 that did not recur in 2020.
2019 vs. 2018
The increase in 2019 of $42 million in selling, general and administrative expenses as compared to 2018 was primarily related to an increase in corporate costs including increased IT, rebranding and other general corporate expenses.
Acquisition and Integration Related Costs
Acquisition and integration related costs $ (9) $ (2) $ 7 n/m $ (7) $ (5) n/m
Acquisition and integration related costs for 2020 are associated with our acquisition of Centauri on October 1, 2020. Acquisition and integration costs incurred in 2019 are comprised of integration costs related to our acquisition of SGT.
Goodwill impairment $ (99) $ — $ 99 n/m $ — $ — n/m
Restructuring charges and asset impairments (214) — 214 n/m — — n/m
See Note 7 "Restructuring charges and asset impairments" and Note 9 "Goodwill and intangible assets" to our consolidated for further discussion.
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Gain (Loss) on Disposition of Assets
Gain (loss) on disposition of assets $ 18 $ 17 $ 1 6 % $ (2) $ 19 n/m
In 2020, we recognized a favorable change in estimated revenues and gross profit associated with variable consideration resulting from resolution of a contingency on a completed LNG project as well as the liquidation of legal entities as part of a broad, ongoing legal entity rationalization project. The gain on disposition of assets in 2019 primarily reflects the gain on sale of a contract vehicle and sale of an equity method investment in our GS business segment.
Gain on Consolidation of Aspire entities
Gain on consolidation of Aspire entities $ — $ — $ — n/m $ 108 $ (108) n/m
The gain on consolidation of Aspire entities in 2018 was recognized upon the consolidation of the Aspire Defence subcontracting entities.
Interest Expense
2020 vs. 2019
The decrease in interest expense was primarily due to lower outstanding borrowings under our Senior Credit Facility during the majority of 2020 as well as lower weighted-average interest rates as a result of the favorable refinancing of our Senior Credit Facility in February 2020 and falling interest rates.See Note 12 "Debt and Other Credit Facilities" to our consolidated financial statements for further discussion.
2019 vs. 2018
The increase in interest expense in 2019 was primarily due to increased fixed-rate borrowings as a result of the Convertible Notes in November 2018 partially offset by lower outstanding borrowings and weighted-average interest rates on our variable-rate debt.
Other Non-operating Income (Loss)
Other non-operating income (loss) $ 1 $ 5 $ (4) 80 % $ (6) $ 11 (183) %
2020 vs. 2019
Other non-operating income (loss) includes interest income, foreign exchange gains and losses and other non-operating income or expense items. The decrease in 2020 was primarily due to settlement during the year of transactions that drive non-cash foreign exchange volatility.
2019 vs. 2018
The increase in other non-operating income was primarily due to the impact of favorable foreign currency movements on intercompany balance positions denominated in U.S. dollars partially offset by unfavorable variances on certain U.S. dollar cash positions held internationally.
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Provision for Income Taxes
2020 vs. 2019
The 2020 period provision for income taxes is lower than the 2019 period primarily due to a significant drop in taxable income largely driven by impairment and restructuring charges incurred in 2020.
2019 vs. 2018
The decrease in income tax expense in 2019 compared to 2018 was primarily driven by the non-recurrence of the $108 million gain recognized in 2018 resulting from our consolidation of the Aspire Defence project subcontracting joint ventures.
A reconciliation of our effective tax rates for 2020, 2019 and 2018 to the U.S. statutory federal rate and further information on the effects of the Tax Act is presented in Note 13 to our consolidated financial statements.
Net Income Attributable to Noncontrolling Interests
2020 vs. 2019
The increase in net income attributable to noncontrolling interests in 2020 was related to a favorable change in estimated variable consideration resulting from resolution of a contingency on a completed LNG project as well as the liquidation of legal entities as part of a broad, ongoing legal entity rationalization project offset by impairment loss related to the Middle East joint venture project in our ES business segment.
2019 vs. 2018
The decrease in net income attributable to noncontrolling interests in 2019 was primarily due to the non-recurrence of the recognition of variable consideration associated with the successful completion and performance testing of a major ES project in Australia in 2018, executed by a consolidated joint venture.
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Results of Operations by Business Segment
We analyze the financial results for each of our three core business segments, as well as our non-core segments. The business segments presented are consistent with our reportable segments discussed in Note 2 to our consolidated financial statements.
Years Ended December 31,
Revenues
Non-strategic Business 4 1 3 n/m 2 (1) (50) %
Gross profit (loss)
Non-strategic Business (8) 5 (13) n/m (6) 11 n/m
Equity in earnings of unconsolidated affiliates
Government Solutions $ 25 $ 29 $ (4) (14) % $ 32 $ (3) (9) %
Non-strategic Business — (13) 13 n/m (3) (10) n/m
Acquisition and integration related costs $ (9) $ (2) $ 7 n/m $ (7) $ (5) n/m
Goodwill impairment $ (99) $ — $ 99 n/m $ — $ — n/m
Restructuring charges and asset impairment $ (214) $ — $ 214 n/m $ — $ — n/m
Gain on disposition of assets $ 18 $ 17 $ 1 6 % $ (2) $ 19 n/m
Gain on consolidation of Aspire entities $ — $ — $ — n/m $ 108 $ (108) n/m
n/m - not meaningful
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Government Solutions
2020 vs. 2019
GS revenues remained relatively consistent at $3.9 billion, with a slight increase of $9 million for 2020 compared to 2019. The increase was primarily driven by growth in Space & Mission Solutions of approximately $104 million, growth in Defense & Intel of approximately $50 million, growth in sustaining programs within Logistics of approximately $50 million, growth in our Australian government business of approximately $60 million and the increased revenues of approximately $125 million from the acquisition of Centauri.These increases were partially offset by revenue of approximately $150 million associated with disaster recovery services provided to the U.S. Air Force on the AFCAP IV project in 2019 that did not recur in 2020, reduced volume in our Middle East overseas contingency operations of approximately $150 million and reduced activity in our international government business of approximately $85 million primarily related to the substantial completion and wind-down of our Aspire Capital Works program.
GS gross profit increased by $53 million, or 12%, to $483 million in 2020 compared to $430 million in 2019. This increase is principally driven by higher mix of higher margin projects as well as favorable changes in estimates on the Aspire Defence project as that project nears completion.
GS equity earnings of unconsolidated affiliates decreased by $4 million to $25 million in 2020 compared to $29 million in 2019, primarily attributable to changes in project estimates in a domestic joint venture.
2019 vs. 2018
GS revenues increased by $468 million, or 14%, to $3.9 billion in 2019, compared to $3.5 billion in 2018. This increase was primarily driven by strong growth within our GS business from new and existing U.S. government contracts including increased volumes for disaster recovery services provided to the U.S. Air Force on the AFCAP IV project, expanded services provided to the U.S. Army in Iraq and Europe on the LogCAP IV project, human performance and behavioral health services provided to the U.S. Special Operations Command and increased engineering services on various other U.S. government programs. GS revenues from the April 2018 acquisition of SGT increased by approximately $139 million in 2019 on a year-over-year basis. A new award from the U.K. MoD for services in the Middle East also contributed to the increase in revenues in 2019.
GS gross profit increased by $80 million, or 23%, to $430 million in 2019, compared to $350 million in 2018. The increase in 2019 was primarily due to the increased volumes on U.S. government contracts and the full year of operations from SGT. In addition, we received a favorable judgment to close out the private security legal matter and settled several other legacy matters on the LogCAP III contract during the year. We recognized incremental profits from construction services related to the Aspire Defence project in the U.K. as uncertainties associated with index-based price adjustments have begun to dissipate.
GS equity in earnings in unconsolidated affiliates decreased by $3 million, or 9%, to $29 million in 2019, compared to $32 million in 2018. The decrease is due to the consolidation of the Aspire Defence subcontracting entities in January 2018 as well as lower profitability from a joint venture project to provide support services on a U.S. government project.
Technology Solutions
2020 vs. 2019
TS revenues decreased by $71 million, or 19% to $303 million in 2020 compared to $374 million in 2019, primarily due to lower proprietary equipment sales and licensing revenue driven by market disruption and delays caused by COVID-19.
TS gross profit decreased by $13 million, or 11%, to $105 million in 2020, compared to $118 million in 2019, primarily due to lower revenue volume partially offset by favorable project close-outs and lower overall overhead spend.
2019 vs. 2018
TS revenues increased by $77 million, or 26%, to $374 million in 2019 compared to $297 million in 2018, primarily due to higher proprietary equipment sales.
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TS gross profit increased by $12 million, or 11%, to $118 million in 2019 compared to $106 million in 2018, primarily driven by increased revenue volume that included a higher mix of proprietary equipment sales.
Energy Solutions
2020 vs. 2019
ES revenues increased by $187 million, or 14%, to $1.5 billion in 2020, compared to $1.3 billion in 2019. The increase was largely attributable to increased volume on existing projects in the U.S. and Mexico, partially offset by the completion or near completion of projects, volume pressures attributable to the COVID-19 market downturn and ensuing KBR portfolio shaping decisions to exit certain elements of the ES business.
ES gross profit decreased by $14 million, or 14%, to $86 million in 2020, compared to $100 million in 2019. This decrease was due to a higher mix of lower margin projects in 2020, lower demand due to the downturn in the energy market caused by COVID-19, and the non-recurrence of favorable close-outs in 2019.
ES equity in earnings of unconsolidated affiliates decreased by $14 million to $5 million in 2020, compared to $19 million in 2019. This decrease was primarily due to benefits associated with the favorable completion of a North Sea project in 2019 that did not recur in 2020 and lower earnings from a U.S. joint venture primarily attributable to COVID-19 market dynamics.
2019 vs. 2018
ES revenues increased by $182 million, or 16%, to $1.3 billion in 2019, compared to $1.2 billion in 2018. Revenues increased by approximately $173 million in our Services and Consulting business primarily due to the ramp up of recently awarded projects and expansion of services internationally, primarily in the Middle East. Revenue increases from new cost-reimbursable projects along the U.S. Gulf Coast in our EPC business were substantially offset by declines resulting from the completion of various EPC projects in the U.S. as well as the Ichthys LNG project in Australia.
ES gross profit decreased by $34 million, or 25% to $100 million in 2019, compared to $134 million in 2018. This decrease was primarily due to non-recurring 2018 events including the recognition of variable consideration associated with the successful completion of an LNG project in Australia and favorable close-outs on several ammonia projects in the U.S. Also contributing to the decline were lower profits from services provided to the Ichthys LNG project joint venture. These decreases were partially offset by earnings in 2019 resulting from the ramp up of new projects in the Middle East and the favorable settlement reached with a supplier on an ammonia project completed in the U.S.
ES equity in earnings in unconsolidated affiliates decreased by $31 million, or 62%, to $19 million in 2019, compared to $50 million in 2018. This decrease was primarily due to the substantial completion of a North Sea oil project, lower earnings due to an unfavorable arbitration ruling in early 2019 associated with a subcontractor on the Ichthys LNG project, and non-recurrence of a release of a tax liability on an Egyptian joint venture in 2018. See Note 6 to our consolidated financial statements for more information on the Ichthys LNG project.
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Non-strategic Business
2020 vs. 2019
All Non-strategic Business projects are substantially complete.We continue to finalize project close-out activities and negotiate the settlement of claims and various other matters associated with these projects.
Non-strategic Business generated revenues of $4 million in 2020 compared to $1 million in 2019, primarily associated with close-out activities on completed projects.
Non-strategic Business incurred a gross loss of $8 million in 2020 primarily due to close-out activities, compared to $5 million gross profit for 2019.
Non-strategic Business earned no equity in earnings of unconsolidated affiliates for 2020 compared to a loss of $13 million for 2019 due to the recognition of an accrued loss associated with an equity investment in 2019.
2019 vs. 2018
Non-strategic Business generated revenues of $1 million in 2019 compared to $2 million in 2018. Revenues in the Non-strategic Business were primarily associated with close-out activities on completed projects as we exit the business.
Non-strategic Business earned $5 million of gross profit in 2019 primarily due to favorable benefits on the close-out of a completed project in the U.S, compared to a gross loss of $6 million in 2018 primarily due to the settlement of a legacy legal matter.
Non-strategic Business equity in earnings from unconsolidated affiliates decreased by $10 million to a loss $13 million in 2019 as compared to a loss of $3 million in 2018 primarily due to an impairment charge associated with an equity method investment in Latin America.
Acquisitions, Dispositions and Other Transactions
Information relating to various acquisitions, dispositions and other transactions is described in Notes 4, 7, 9 and 10 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part II, Item 7.
Backlog of Unfilled Orders
Backlog generally represents the total dollar amount of revenues we expect to realize in the future as a result of performing work on contracts and our pro-rata share of work to be performed by unconsolidated joint ventures. We generally include total expected revenues in backlog when a contract is awarded under a legally binding agreement. In many instances, arrangements included in backlog are complex, nonrepetitive and may fluctuate over the contract period due to the release of contracted work in phases by the customer. Additionally, nearly all contracts allow customers to terminate the agreement at any time for convenience. Certain contracts provide maximum dollar limits, with actual authorization to perform work under the contract agreed upon on a periodic basis with the customer. In these arrangements, only the amounts authorized are included in backlog. For projects where we act solely in a project management capacity, we only include the expected value of our services in backlog.
For U.S. government contracts, backlog includes our estimate of the remaining future revenue from existing contracts over the base contract performance period (including customer approved option periods) for which work scope and price have been agreed with the customer. Funded backlog represents the portion of backlog for which funding currently is appropriated, less the amount of revenue we have previously recognized. Unfunded backlog represents the total backlog less the funded backlog. Our backlog does not include any estimate of future potential delivery orders that might be awarded under our government-wide acquisition contracts, agency-specific indefinite delivery/indefinite quantity contracts or other multiple-award contract vehicles nor does it include option periods that have not been exercised by the customer.
For U.K. government PFIs, we estimate backlog based on the aggregate amount that our client would contractually be obligated to pay us over the life of the project. We update our estimates of the future work to be executed under these contracts on a quarterly basis and adjust backlog if necessary.
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Refer to "Item 1A. Risk Factors" contained in Part 1 of this Annual Report on Form 10-K for a discussion of other factors that may cause backlog to ultimately convert into revenues at different amounts.
We have included in the table below our proportionate share of unconsolidated joint ventures' estimated backlog. Since these projects are accounted for under the equity method, only our share of future earnings from these projects will be recorded in our results of operations. Our proportionate share of backlog for projects related to unconsolidated joint ventures totaled $2.4 billion and $2.6 billion at December 31, 2020 and 2019, respectively. Our backlog included in the table below for projects related to consolidated joint ventures with noncontrolling interests includes 100% of the backlog associated with those joint ventures and totaled $52 million and $78 million at both December 31, 2020 and 2019.
The following table summarizes our backlog by business segment for the years ended December 31, 2020 and December 31, 2019, respectively:
Non-strategic Business — —
Backlog for the ES business segment decreased approximately $1.2 billion during the year ended December 31, 2020 primarily due to management's decision to discontinue pursuing certain projects. For further discussion, see Notes 1 and 7 to our consolidated financial statements.
We estimate that as of December 31, 2020, 28% of our backlog will be executed within one year. Of this amount, 87% will be recognized as revenue on our consolidated statement of operations and 13% will be recorded by our unconsolidated joint ventures. As of December 31, 2020, $107 million of our backlog relates to active contracts that are in a loss position.
As of December 31, 2020, 13% of our backlog was attributable to fixed-price contracts, 47% was attributable to PFIs and 40% was attributable to cost-reimbursable contracts. For contracts that contain both fixed-price and cost-reimbursable components, we classify the individual components as either fixed-price or cost-reimbursable according to the composition of the contract; however, for smaller contracts, we characterize the entire contract based on the predominant component. As of December 31, 2020, $9.3 billion of our GS backlog was currently funded by our customers.
As of December 31, 2020, we had approximately $3.9 billion of priced option periods for U.S. government contracts that are not included in the backlog amounts presented above.
The difference between backlog of $15.1 billion and the remaining performance obligation as defined by ASC 606 of $12.0 billion is primarily due to our proportionate share of backlog related to unconsolidated joint ventures which is not included in our remaining performance obligation. See Note 3 to our consolidated financial statements for discussion of the remaining performance obligations.
Liquidity and Capital Resources
Liquidity is provided by available cash and equivalents, cash generated from operations, our Senior Credit Facility and access to financial markets. Our operating cash flow can vary significantly from year to year and is affected by the mix, terms, timing and stage of completion of our projects. We often receive cash in the early phases of our larger fixed-price projects, technology projects, and those of our consolidated joint ventures in advance of incurring related costs. On reimbursable contracts, we may utilize cash on hand or availability under our Senior Credit Facility to satisfy any periodic operating cash requirements for working capital, as we incur costs and subsequently invoice our customers.
ES services projects generally require us to provide credit support for our performance obligations to our customers in the form of letters of credit, surety bonds or guarantees. Our ability to obtain new project awards in the future may be dependent on our ability to maintain or increase our letter of credit and surety bonding capacity, which may be further
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dependent on the timely release of existing letters of credit and surety bonds. As the need for credit support arises, letters of credit will be issued under our $1 billion Revolver under our Senior Credit Facility. Letters of credit may also be arranged with our banks on a bilateral, syndicated or other basis.
As discussed in Note 12 "Debt and Other Credit Facilities" of our consolidated financial statements, we amended our Senior Credit Facility on February 7, 2020, reducing the applicable margins and commitment fees associated with the various borrowings under the facility. Additionally, the amendment extended maturity dates with respect to the Revolver, PLOC and Term Loan A to February 2025 and Term Loan B to February 2027. On July 2, 2020, we amended our Senior Credit Facility to convert the $500 million capacity formerly available under our PLOC to our Revolver, thereby increasing our Revolver capacity from $500 million to $1 billion. The aggregate capacity of our Senior Credit Facility remained $1.795 billion and all other terms and conditions remain unchanged. On September 14, 2020, we further amended our Senior Credit Facility to modify the definition and calculation of Consolidated EBITDA (as defined therein) to provide for more flexibility in permitting pro forma cost reductions resulting from certain corporate transactions. We believe that existing cash balances, internally generated cash flows, availability under our Senior Credit Facility and other lines of credit are sufficient to support our business operations for the next 12 months. As of December 31, 2020, we were in compliance with all financial covenants related to our debt agreements.
Cash and equivalents totaled $436 million at December 31, 2020 and $712 million at December 31, 2019 and consisted of the following:
December 31,
Domestic U.S. cash $ 54 $ 207
Joint venture and Aspire Defence project cash 151 260
Our cash balances are held in numerous accounts throughout the world to fund our global activities. Domestic cash relates to cash balances held by U.S. entities and is largely used to support project activities of those businesses as well as general corporate needs such as the payment of dividends to shareholders, repayment of debt and potential repurchases of our outstanding common stock.
Our international cash balances may be available for general corporate purposes but are subject to local restrictions, such as capital adequacy requirements and maintaining sufficient cash balances to support our U.K. pension plan and other obligations incurred in the normal course of business by those foreign entities. Repatriations of our undistributed foreign earnings are generally free of U.S. tax but may incur withholding and/or state taxes. We consider our future U.S. and non-U.S. cash needs as 1) our anticipated foreign working capital requirements, including funding of our U.K. pension plan, 2) the expected growth opportunities across all geographical markets and 3) our plans to invest in strategic growth opportunities, which may include acquisitions around the world, including whether foreign earnings are permanently reinvested. For December 31, 2019, we changed our permanent reinvestment assertion on our undistributed earnings on a wholly owned subsidiary in Saudi Arabia. We determined that $70 million of undistributed earnings was available for future repatriation of cash for deployment in the U.S. and recorded the income tax expense expected with the future repatriation. During 2020, we repatriated the $70 million. If management were to completely remove the indefinite investment assertion on all foreign subsidiaries, the exposure to local withholding taxes would be less than $21 million.
Joint venture cash and Aspire Defence project cash balances reflect the amounts held by joint venture entities that we consolidate for financial reporting purposes. These amounts are limited to those entities' activities and are not readily available for general corporate purposes; however, portions of such amounts may become available to us in the future should there be a distribution of dividends to the joint venture partners. We expect that the majority of the joint venture cash balances will be utilized for the corresponding joint venture purposes or for paying dividends.
As of December 31, 2020, substantially all of our excess cash was held in commercial bank time deposits or interest bearing short-term investment accounts with the primary objectives of preserving capital and maintaining liquidity.
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Cash Flows
The following table summarizes our cash flows for the periods indicated:
Years ended December 31,
Cash flows provided by operating activities $ 367 $ 256 $ 165
Cash flows used in investing activities (877) (158) (491)
Cash flows provided by (used in) financing activities 225 (133) 654
Effect of exchange rate changes on cash 9 8 (28)
(Decrease) increase in cash and equivalents $ (276) $ (27) $ 300
Operating Activities. Cash flows from operating activities result primarily from earnings and are affected by changes in operating assets and liabilities which consist primarily of working capital balances for projects. Working capital levels vary from year to year and are primarily affected by the Company's volume of work. These levels are also impacted by the mix, stage of completion and commercial terms of projects. Working capital requirements also vary by project depending on the type of client and location throughout the world.
The primary components of our working capital accounts are accounts receivable, contract assets, accounts payable and contract liabilities. These components are impacted by the size and changes in the mix of our cost reimbursable versus fixed price projects, and as a result, fluctuations in these components are not uncommon in our business.
Cash provided by operations totaled $367 million in 2020 as compared to net loss in 2020 of $51 million. The difference is principally the result of non-cash restructuring charges, asset impairments, depreciation and amortization, growth in our business and transition associated with our recent acquisitions, in addition to net changes in working capital balances for projects impacting operating cash flows as discussed below:
•Accounts receivable favorable cash flow impact of $127 million primarily from factoring of receivables and increased collections on certain projects within our ES business segment and TS business segment.
•Contract assets favorable cash flow impact of $39 million was largely attributable to increased billings on U.S. government projects in our GS business segment and various projects in our ES business segment.
•Accounts payable unfavorable cash flow impact of $40 million was largely attributable to timing of payments on certain U.S. government contracts and several projects in our TS business segment.
•Contract liabilities unfavorable cash flow impact of $134 million was primarily due to progress against project advances on the Aspire Defence project and U.S. government projects in our GS business segment.
•Accrued salaries, wages and benefits favorable cash flow impact of $38 million was primarily due to the deferral of payroll tax amounts under the CARES Act.
•We received distributions of earnings from our unconsolidated affiliates of $38 million and contributed $46 million to our pension funds in 2020.
Cash provided by operations totaled $256 million in 2019 as compared to net income in 2020 of $209 million. The difference primarily results from net changes in working capital balances for projects as discussed below:
•The $16 million unfavorable cash flow impact related to accounts receivable was primarily related to increased billing volume due to the ramp up of recently awarded cost-reimbursable projects in the Middle East and several new EPC projects in the U.S. within our ES business segment offset by strong collections on several projects in our GS business segment.
•The $31 million unfavorable cash flow impact related to contract assets was largely attributable to higher activity on EPC projects in our ES business segment as well as increased volume in our TS business segment.
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•The $23 million favorable cash flow impact related to increased accounts payable on several projects in the U.S. and Middle East in our ES business segment as well as various projects in our TS business segment, offset by decreased volume as a U.S. project winds down in our GS business segment.
•The $19 million favorable cash flow impact related to contract liabilities was primarily due to advances related to growth and ramp up of new EPC and services primarily in the U.S. in our ES business segment, offset by progress on several projects in our TS business segment.
•We received distributions of earnings from our unconsolidated affiliates of $69 million and contributed $45 million to our pension funds in 2019. In addition, we collected $57 million from the U.S. Army in the private security matter contractor settlement, of which $44 million which was previously recorded in "Claims receivable" on our consolidated balance sheets.
Investing activities. Cash used in investing activities totaled $877 million in 2020 and was primarily attributable to the acquisition of Centauri, net of cash acquired of $823 million, the acquisition of SMA, and funding our proportionate share of JKC's ongoing legal and commercial costs. See Note 4 for further discussion on the acquisitions and Note 6 for further discussion of the legal and commercial costs.
Cash used in investing activities totaled $158 million in 2019 and was primarily due to investment in JKC. See Note 6 to our consolidated financial statements for discussion of the Ichthys Project and our investment contributions to JKC.
Financing activities. Cash provided by financing activities totaled $225 million in 2020 and was primarily due to approximately $245 million of net proceeds from the offering of our 4.750% Senior Notes due 2028 and borrowings of $260 million on our Senior Credit Facility, offset by $410 million in net payments on borrowings which includes voluntary principal payments related to the refinancing of our Senior Credit Facility, $11 million repayment on our non-recourse debt associated with our Fasttrax joint venture, $11 million repayment on our finance lease obligations, $54 million of dividend payments to common shareholders, and $47 million for the repurchase of common stock under our share repurchase program. See Note 12 "Debt and Other Credit Facilities" for further discussion of our Senior Credit Facility and Note 19 "Share Repurchases" for further discussion on our share repurchase program.
Cash used in financing activities totaled $133 million in 2019 and was primarily due to $70 million in payments on borrowings under our Senior Credit Facility and $46 million for dividend payments to common shareholders.
Future sources of cash. We believe that future sources of cash include cash flows from operations (including accounts receivable monetization arrangements), cash derived from working capital management, and cash borrowings under the Senior Credit Facility.
Future uses of cash. We believe that future uses of cash include working capital requirements, joint venture capital calls, capital expenditures, dividends, pension funding obligations, repayments of borrowings, share repurchases and strategic investments including acquisitions. Our capital expenditures will be focused primarily on facilities and equipment to support our businesses. In addition, we will use cash to make payments under leases and various other obligations, including potential litigation payments, as they arise.
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Other factors potentially affecting liquidity
Ichthys LNG Project. In reference to Note 6 "Unapproved Change Orders, and Claims, Against Clients and Estimated Recoveries of Claims Against Suppliers and Subcontractors” to our consolidated financial statements, JKC has included in its project estimates-at-completion significant revenues associated with unapproved change orders and claims against the client as well as estimated recoveries of claims against suppliers and subcontractors. The client has reserved their contractual rights on certain amounts previously funded to JKC and may seek recoveries of those amounts, including calling the performance and warranty letters of credit. In January 2021, the client demanded that JKC repay the Funding Deed amount and notified JKC of its intention to commence legal actions against JKC including claims on the parent company guarantees.JKC is opposing the client’s payment demand and believes that the client has not complied with the contract requirements to make these sums repayable. JKC believes the subcontractor settlement sums were properly incurred and represent reimbursable cost.
JKC incurred substantial costs to complete the power plant under the fixed-price portion of the Ichthys LNG contract. JKC believes these costs are recoverable from the Consortium who abandoned their contractual obligation to complete the power plant as the original subcontractor. We have initiated arbitrations and other legal proceedings to recover these costs which may take several years to resolve. As a result, we funded our proportionate share of JKC's capital requirements to complete the power plant as these legal proceedings progress.
We have made investment contributions to JKC of approximately $484 million through December 31, 2020 to fund our proportionate share of the project execution activities on an inception-to-date basis. We continue to fund our proportionate share of ongoing legal and commercial costs. JKC's obligations to the client are guaranteed on a joint and several basis by the joint venture partners. Negotiations and legal proceedings with the client and the subcontractors are ongoing, the goal of which is to minimize these expected outflows. If we experience unfavorable outcomes associated with the various legal and commercial disputes, our total investment contributions could increase which could have a material adverse effect on our financial position and cash flows.
As of December 31, 2020, we had $164 million in letters of credit outstanding in support of performance and warranty guarantees provided to the client.
U.K. pension obligation. We have recognized on our consolidated balance sheet a funding deficit of $381 million (measured as the difference between the fair value of plan assets and the projected benefit obligation as of December 31, 2020) for our frozen defined benefit pension plans. The total amounts of employer pension contributions paid for the year ended December 31, 2020 were $46 million and primarily related to our defined benefit plan in the U.K. The funding requirements for our U.K. pension plan are determined based on the U.K. Pensions Act 1995. Annual minimum funding requirements are based on a binding agreement with the trustees of the U.K. pension plan that is negotiated on a triennial basis which is slated to commence in 2021 and is required to be completed by April 2022. The current agreement calls for minimum annual contributions of £33 million ($45 million at current exchange rates) until the next minimum funding requirements are finalized. In the future, pension funding may increase or decrease depending on changes in the levels of interest rates, pension plan asset return performance and other factors. A significant increase in our funding requirements for the U.K. pension plan could result in a material adverse impact on our financial position.
Senior Credit Facility
Information relating to our Senior Credit Facility is described in Note 12 "Debt and Other Credit Facilities" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part II, Item 7.
Senior Notes
Information relating to our Senior Notes is described in Note 12 "Debt and Other Credit Facilities" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part II, Item 7.
Convertible Senior Notes
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Information relating to our Convertible Senior Notes is described in Note 12 "Debt and Other Credit Facilities" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part II, Item 7.
Nonrecourse Project Finance Debt
Information relating to our nonrecourse project debt is described in Note 12 "Debt and Other Credit Facilities" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part II, Item 7.
Off-Balance Sheet Arrangements
Letters of credit, surety bonds and guarantees. In the ordinary course of business, we may enter into various arrangements providing financial or performance assurance to customers on behalf of certain consolidated and unconsolidated subsidiaries, joint ventures and other jointly executed contracts. Such off-balance sheet arrangements include letters of credit, surety bonds and corporate guarantees to support the creditworthiness or project execution commitments of these entities and typically have various expiration dates ranging from mechanical completion of the project being constructed to a period beyond completion in certain circumstances such as for warranties. We may also guarantee that a project, once completed, will achieve specified performance standards. If the project subsequently fails to meet guaranteed performance standards, we may incur additional costs, pay liquidated damages or be held responsible for the costs incurred by the client to achieve the required performance standards. The potential amount of future payments that we could be required to make under an outstanding performance arrangement is typically the remaining estimated cost of work to be performed by or on behalf of third parties. For cost reimbursable contracts, amounts that may become payable pursuant to guarantee provisions are normally recoverable from the client for work performed under the contract. For lump-sum or fixed-price contracts, the performance guarantee amount is the cost to complete the contracted work, less amounts remaining to be billed to the client under the contract. Remaining billable amounts could be greater or less than the cost to complete the project. If costs exceed the remaining amounts payable under the contract, we may have recourse to third parties, such as owners, subcontractors or vendors for claims.
In our joint venture arrangements, the liability of each partner is usually joint and several. This means that each joint venture partner may become liable for the entire risk of performance guarantees provided by each partner to the customer. Typically each joint venture partner indemnifies the other partners for any liabilities incurred in excess of the liabilities the other party is obligated to bear under the respective joint venture agreement. We are unable to estimate the maximum potential amount of future payments that we could be required to make under outstanding performance guarantees related to joint venture projects due to a number of factors, including but not limited to, the nature and extent of any contractual defaults by our joint venture partners, resource availability, potential performance delays caused by the defaults, the location of the projects, and the terms of the related contracts. See “Item 1A. Risk Factors” contained in Part I of this Annual Report on Form 10-K for information regarding our fixed-price contracts and operations through joint ventures and partnerships.
In certain limited circumstances, we enter into financial guarantees in the ordinary course of business, with financial institutions and other credit grantors, which generally obligate us to make payment in the event of a default by the borrower. These arrangements generally require the borrower to pledge collateral to support the fulfillment of the borrower’s obligation. We account for both financial and performance guarantees at fair value at issuance in accordance with ASC 460-10 Guarantees and, as of December 31, 2020, we had no material guarantees of the work or obligations of third parties recorded.
We have committed and uncommitted lines of credit available to be used for letters of credit. As of December 31, 2020, our total capacity under these committed and uncommitted lines of credit was approximately $1.4 billion of which $316 million had been utilized. Information relating to our letters of credit is described in Note 12 "Debt and Other Credit Facilities" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part II, Item 7. Other than as discussed in this report, we have not engaged in any material off-balance sheet financing arrangements through special purpose entities.
On October 1, 2020, the Company borrowed $260 million on the Senior Credit Facility to fund the acquisition of Centauri, as further discussed in Note 4 “Acquisitions” and Note 12 "Debt and Other Credit Facilities" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
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Contractual obligations and commitments
Significant contractual obligations and commercial commitments as of December 31, 2020 are as follows:
Payments Due
Nonrecourse project finance debt 5 1 1 — — — 7
(a)Determined based on long-term debt borrowings outstanding at the end of 2020 using the interest rates in effect for the individual borrowings as of December 31, 2020, including the effects of interest rate swaps. The payments due for interest reflect the cash interest that will be paid, which includes interest on outstanding borrowings and commitment fees. These amounts exclude the amortization of discounts or debt issuance costs.
(b)Included in our pension funding obligations are payments related to our agreement with the trustees of our U.K. pension plan. The agreement for this plan calls for minimum annual contributions of £33 million ($45 million at current exchange rates) from 2021 through the next valuation.
(c)In the ordinary course of business, we enter into commitments to purchase software and related maintenance, materials, supplies and similar items. The purchase obligations disclosed above do not include purchase obligations that we enter into with vendors in the normal course of business that support direct project costs on existing contracting arrangements with our customers. We expect to recover such obligations from our customers.
(d)We have excluded uncertain tax positions totaling $96 million as of December 31, 2020. The ultimate timing of settlement of these obligations cannot be determined with reasonable assurance. See Note 13 to our consolidated financial statements for further discussion on income taxes. Additionally, we have excluded our proportionate share of obligations totaling $157 million as of December 31, 2020 related to the Funding Deeds on the Ichthys LNG Project. See Note 6 to our consolidated financial statements for further discussion.
Transactions with Joint Ventures
In the normal course of business, we form incorporated and unincorporated joint ventures to execute projects. In addition to participating as a joint venture partner, we often provide engineering, procurement, construction, operations or maintenance services to the joint venture as a subcontractor. Where we provide services to a joint venture that we control and therefore consolidate for financial reporting purposes, we eliminate intercompany revenues and expenses on such transactions. In situations where we account for our interest in the joint venture under the equity method of accounting, we do not eliminate any portion of our subcontractor revenues or expenses, however, we recognize profit on our subcontractor scope of work only to the extent the joint venture's scope of work to the end customer is complete. We recognize profit over time on our services provided to joint ventures that we consolidate and joint ventures that we record under the equity method of accounting. See Note 10 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information. The information discussed therein is incorporated by reference into this Part II, Item 7.
Recent Accounting Pronouncements
Information relating to recent accounting pronouncements is described in Note 23 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part II, Item 7.
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U.S. Government Matters
Information relating to U.S. government matters commitments and contingencies is described in Note 15 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part II, Item 7.
Legal Proceedings
Information relating to various commitments and contingencies is described in Notes 15 and 16 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K and the information discussed therein is incorporated by reference into this Part II, Item 7.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which have been prepared in conformity with U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the determination of financial positions, results of operations, cash flows and related disclosures. Our significant accounting policies are described in Note 1 to our consolidated financial statements. The following discussion is intended to highlight and describe those accounting policies that are especially critical to the preparation of our consolidated financial statements and to provide a better understanding of our significant accounting estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements. Significant accounting estimates are important to the representation of our financial position and results of operations and involve our most difficult, subjective or complex judgments. We base our estimates on historical experience and various other assumptions we believe to be reasonable according to the current facts and circumstances through the date of the issuance of our financial statements.
Contract Revenue. We adopted ASC Topic 606 Revenue from Contracts with Customers on January 1, 2018, for our consolidated entities and for each of the unconsolidated Aspire Defence contracting entities and on January 1, 2019 for our remaining unconsolidated affiliates including the subsequent ASUs that amended and clarified the related guidance. Our policy on revenue recognition is provided in Note 1 to our consolidated financial statements for the year ended December 31, 2020. We recognize revenue on substantially all of our contracts over time, as performance obligations are satisfied, due to the continuous transfer of control to the customer. Our contracts are generally accounted for as a single performance obligation and are not segmented between types of services provided. We recognize revenue on those contracts over time using the cost-to-cost method, based primarily on contract costs incurred to date compared to total estimated contract costs at completion. Contract costs include all direct materials, labor and subcontractors costs and indirect costs related to contract performance. We believe this method is the most accurate measure of contract performance because it directly measures the value of the goods and services transferred to the customer. For all other contracts where we have the right to consideration from the customer in an amount that corresponds directly with the value received by the customer based on our performance to date, we recognized revenue when services are performed and contractually billable.