10-K 1 kbr1231201610-k.htm 10-K Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-K
ý
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
OR
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from             to
Commission File Number: 1-33146
 
 
 
kbrlogoa07.gif
KBR, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
20-4536774
(State of incorporation or organization)
 
(I.R.S. Employer Identification No.)
601 Jefferson Street, Suite 3400, Houston, Texas
 
77002
(Address of principal executive offices)
 
(Zip Code)
(713) 753-3011
(Registrant's telephone number including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock par value $0.001 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨    No  ý

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.      ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  ý

The aggregate market value of the voting stock held by non-affiliates on June 30, 2016 was approximately $1.9 billion, determined using the closing price of shares of the registrant's common stock on the New York Stock Exchange on that date of $13.24.

As of January 31, 2017, there were 142,878,363 shares of KBR, Inc. Common Stock, par value $0.001 per share, outstanding.
 
  
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2017 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.
 



TABLE OF CONTENTS
 
 
 
 
Page
 
 
FINANCIAL STATEMENTS
 
 
 



2


Forward-Looking and Cautionary Statements

This Annual Report on Form 10-K contains certain statements that are, or may be deemed to be, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Some of the statements contained in this Annual Report on Form 10-K are forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. The words "believe," "may," "estimate," "continue," "anticipate," "intend," "plan," "expect" and similar expressions are intended to identify forward-looking statements. Forward-looking statements include information concerning our possible or assumed future financial performance and results of operations.

We have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. While it is not possible to identify all factors, factors that could cause actual future results to differ materially include the risks and uncertainties disclosed under “Item 1A. Risk Factors” contained in Part I of this Annual Report on Form 10-K.

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


3


PART I

Item 1. Business

General

KBR, Inc. and its subsidiaries (collectively, "KBR" or "the Company") is a global provider of differentiated, professional services and technologies across the asset and program life-cycle within the government services and hydrocarbons industries. Our capabilities include highly-specialized engineering services, mission and logistics support solutions, technology licensing, specialized consulting, procurement, construction, construction management, program management, operations, maintenance and other support services to a diverse customer base, including domestic and foreign governments, international and national oil and gas companies, independent refiners, petrochemical producers, fertilizer producers and manufacturers. Information regarding business segment disclosures included in Note 2 to our consolidated financial statements and "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 is incorporated by reference into this Part I, Item 1.

KBR, Inc. is a global company headquartered in Houston, TX, USA, with offices around the world operations in over 40 countries and serving customers in over 70 countries. We were incorporated in Delaware on March 21, 2006 prior to an exchange offer transaction that separated us from our former parent, Halliburton Company, which was completed on April 5, 2007. We trace our history and culture to two businesses, The M.W. Kellogg Company ("Kellogg") and Brown & Root, Inc. ("Brown & Root"). Kellogg was founded in New York in 1901 and evolved into a technology and service provider for petroleum refining and petrochemicals processing. Brown & Root was founded in Houston, Texas in 1919 and built the world’s first offshore platform in 1947. Brown & Root was acquired by Halliburton in 1962 and Kellogg was acquired by Halliburton in 1998 through its merger with Dresser Industries. In 2016, we made two substantial acquisitions in the government services sector, which fundamentally and materially re-balanced our portfolio to a greater mix of long-term, cost reimbursable and synergistic professional services business base. This new business base, added to KBR’s existing portfolio, leverages our program and life-cycle management expertise across a much larger addressable market for expanded customer offerings and attendant growth opportunities.

Our Business Strategy

KBR’s vision is to be a global provider of professional services, across the asset life-cycle, from project inception, to facility implementation to asset maintenance and program management integration. We aim to execute a majority of our portfolio through contracts that are long-term, reimbursable, service contracts with a low-risk profile and predictable cash flows. Our key areas of strategic focus are as follows:

•
Government Services: A wide range of professional services across defense, space and government embracing research and development, test and evaluation, program acquisition, program management integration, and program sustainment. These services are mainly for governmental agencies in the United States ("U.S."), United Kingdom ("U.K.") and Australia and also cover other selective countries. These programs are frequently provided on long-term service contracts, with key scientific, technical and program management differentiation. Key customers include U.S. Department of Defense agencies such as the Missile Defense Agency, U.S. Army, U.S. Navy and U.S. Air Force as well as NASA, 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.
•
Hydrocarbons: In the global hydrocarbons sector we offer four primary services:
◦
Proprietary Technology: A broad spectrum of front-end services and solutions, including licensing of technologies, basic engineering and design services ("BED"), proprietary equipment ("PEQ"), plant automation services, remote monitoring of plant operations, catalysts, solvents and vessel internals together with specialist consulting services to the hydrocarbons, petrochemicals, chemicals and fertilizer markets. Key technologies in our portfolio are ammonia, nitric acid, ammonia nitrate, ethylene, phenol, bis-phenol A, polycarbonate, catalytic cracking, isomerization, alkylation, solvent de-asphalting and coal degasification.
◦
Specialized Consulting: A broad range of specialized consulting services across upstream, midstream, downstream and specialty chemicals; which includes:
•
Front-end consulting services related to field development planning, technology selection and capital expenditure optimization;
•
Plant integrity management;

4


•
Specialized naval architecture technology (drillships, floating production, storage and offshore ("FPSO"), floating production units ("FPUs") and structural engineering);
•
Feasibility studies, revamp studies, planning/development and construction studies for oil and gas (upstream industry), liquefied natural gas ("LNG"), refining, petrochemicals, chemicals and fertilizers (downstream industries).

◦
Project Delivery Solutions: From conceptual design, through front end engineering design and execution planning, to full engineering, procurement and construction ("EPC")/engineering, procurement, construction and maintenance ("EPCM") delivery for the development, construction and commissioning of projects across the entire hydrocarbons value chain, including offshore and onshore oil and gas industries, LNG/ gas to liquids ("GTL") markets, as well as for refining, petrochemicals, chemicals, specialty chemicals and fertilizers industries. KBR has licensed its market leading Ammonia Technology to over 225 Plants globally, and has constructed around 35% of the world’s LNG Capacity.
◦
Maintenance and Asset Services: Through our Brown & Root Industrial Services joint venture in North America and through KBR’s wholly owned Brown & Root entities in the Middle East, Europe (including Poland, Russia and the Netherlands) and APAC, we are a leading provider of engineering, construction, and reliability-driven maintenance solutions for the refinery, petrochemical, chemical, specialty chemicals and fertilizer markets. The focus is on customers seeking to achieve greater asset utilization and reliability to cut costs and increase production from existing assets, including small projects, sustaining capital, turnarounds, maintenance, specialty welding services, and high quality scaffolding. These contracts are generally long-term service contracts.
◦
Over the last few years, KBR has migrated into training simulators for a variety of process plants, and remote monitoring operations as part of its journey to digitalization.
Competitive Advantages
We operate in global markets with customers who demand added value, know-how, technology and delivery solutions, and we seek to differentiate ourselves in areas we believe we have a competitive advantage, including:
•
Health, Safety, Security & Environment
◦
World-class planning, assessment, and execution practices and performance ('Zero Harm')

•
People
◦
Distinctive, competitive and customer-focused culture, through our people ('One KBR')
◦
Large numbers of employees with U.S. government-issued security clearances

•
Customer Relationships
◦
Customer objectives are placed at the center of our planning and delivery
◦
Long-term relationships in government services (for example, we have had a contract with NASA since the beginning of the space program) and with major oil and gas customers such as British Petroleum, Chevron Corporation and Shell Corporation.

•
Project Delivery
◦
A reputation for successful delivery of large, complex and difficult projects globally - using world-class processes (the 'KBR Way'), including program management integrator

•
Technical Excellence
◦
Quality, world-class technology, know-how and technical solutions

•
Full Life-cycle Asset Support
◦
Comprehensive asset services through long-term contracts

•
Financial Strength
◦
Through liquidity, capital capacity and ability to support warranties

5


Our Business Segments

Our business is organized into three core and two non-core business segments as follows:

Core business segments

•
Government Services
•
Technology & Consulting
•
Engineering & Construction

Non-core business segments

•
Non-strategic Business
•
Other

Our business segments are described below.

Government Services ("GS"). Our GS business segment provides full life-cycle support solutions to defense, space, aviation and other programs and missions for government agencies in the U.S., U.K. and Australia. As program management integrator, KBR covers the full spectrum of defense, space, aviation and other government programs and missions from research and development; through systems engineering; test and evaluation; systems integration; program management; to operations support, maintenance and field logistics. Our recent acquisitions, as described in Note 3 to our consolidated financial statements, have been combined with our existing U.S. operations within this business segment and operate under the single "KBRwyle" brand.
Technology & Consulting ("T&C"). Our T&C business segment combines proprietary KBR technologies, knowledge-based services and our three specialty consulting brands, Granherne, Energo and GVA, under a single customer-facing global business.  This segment provides licensed technologies and consulting services to the hydrocarbons value chain, from wellhead to crude refining and through refining and petrochemicals to specialty chemicals production.  In addition to sharing many of the same customers, these brands share the approach of early and continuous customer involvement to deliver an optimal solution to meet the customers' objectives through early planning and scope definition, advanced technologies and project life-cycle support.
Engineering & Construction ("E&C"). Our E&C business segment provides comprehensive project and program delivery capability globally. Our key capabilities leverage our operational and technical excellence as a global provider of EPC for onshore oil and gas; LNG/GTL; oil refining; petrochemicals; chemicals; fertilizers; offshore oil and gas (shallow-water, deep-water, subsea); floating solutions (FPU, FPSO, floating liquefied natural gas ("FLNG") & floating storage and regasification unit ("FSRU")); and maintenance services (via the “Brown & Root Industrial Services” brand).
Non-strategic Business. Our Non-strategic Business segment represents the operations or activities that we intend to exit upon completion of existing contracts. This segment also included businesses we exited upon sale to third parties during 2015.
Other. Our Other business segment includes our corporate expenses and general and administrative expenses not allocated to the business segments above and any future activities that do not individually meet the criteria for segment presentation. 
Based on the location of projects executed, our operations in countries other than the U.S. accounted for 51%, 57% and 63% of our consolidated revenues during 2016, 2015 and 2014, respectively. See Note 2 to our consolidated financial statements for selected geographic information.


6


We have summarized our revenues by geographic location as a percentage of total revenues below:
 
Years ended December 31,
 
2016
 
2015
 
2014
Revenues:
 
 
 
 
 
United States
49
%
 
43
%
 
37
%
Middle East
20
%
 
15
%
 
11
%
Europe
12
%
 
10
%
 
10
%
Australia
9
%
 
16
%
 
22
%
Canada
3
%
 
4
%
 
12
%
Africa
3
%
 
3
%
 
4
%
Other
4
%
 
9
%
 
4
%
Total
100
%
 
100
%
 
100
%

We market substantially all of our project and service offerings through our business segments. The markets we serve are highly competitive and for the most part require substantial resources and highly skilled and experienced technical personnel. A large number of companies are competing in the markets served by our business, including U.S. based companies such as Fluor Corporation, Jacobs Engineering, AECOM, Science Applications International Corporation ("SAIC"), Booz Allen Hamilton and international-based companies such as AMEC Foster Wheeler, Chicago Bridge and Iron, Chiyoda Corporation ("Chiyoda"), JGC Corporation ("JGC"), McDermott International, TechnipFMC and Worley-Parsons. Since the markets for our services are vast and extend across multiple geographic regions, we cannot make a definitive estimate of the total number of our competitors.

Our operations in some countries may be adversely affected by unsettled political conditions, acts of terrorism, civil unrest, war or other armed conflict, expropriation or other governmental actions, inflation and foreign currency exchange controls and fluctuations. We strive to manage or mitigate these risks through a variety of means including contract provisions, contingency planning, insurance schemes, hedging and other risk management activities. See "Item 1A. Risk Factors" contained in Part I of this Annual Report on Form 10-K, "Item 7A. Quantitative and Qualitative Discussion about Market Risk" contained in Part II of this Annual Report on Form 10-K and Note 21 to our consolidated financial statements for information regarding our exposures to foreign currency fluctuations, risk concentration and financial instruments used to manage our risks.

Acquisitions, Dispositions and Other Transactions

Acquisitions

During the first quarter of 2016, we acquired 100% of the outstanding common stock of three subsidiaries of Connell Chemical Industry LLC (through its subsidiary, Chematur Technologies AB): Plinke GmbH ("Plinke"), Weatherly Inc. ("Weatherly") and Chematur Ecoplanning Oy ("Ecoplanning") for net cash consideration of $23 million within our T&C business segment.

During the third quarter of 2016, we acquired 100% of the equity interests of Wyle Inc. ("Wyle") from its shareholders, including Court Square Capital Partners and certain officers of Wyle, pursuant to an agreement and plan of merger for net cash consideration of $623 million, and we acquired 100% of the outstanding common stock of Honeywell Technology Solutions Inc. from Honeywell International Inc. for net cash consideration of $280 million, both within our GS business segment.

See Note 3 to our consolidated financial statements for more information.

Dispositions

During the fourth quarter of 2015, we completed the sale of our Infrastructure Americas business for $18 million in net cash proceeds within our Non-strategic Business segment. See Note 3 to our consolidated financial statements for more information. We also closed on the sale of our U.K. office facility located in Greenford for net cash proceeds of $33 million within our E&C business segment and a U.S. office facility located in Birmingham, Alabama for net cash proceeds of $6 million within our Non-strategic Business segment. See Note 8 to our consolidated financial statements for more information.


7


During the second quarter of 2015, we completed the sale of our Building Group subsidiary for $23 million in net cash proceeds within our Non-strategic Business segment. See Note 3 to our consolidated financial statements for more information.

Other Transactions

During the first quarter of 2016 we executed agreements to establish Affinity Flying Training Services Ltd. ("Affinity"), a joint venture between KBR and Elbit Systems, within our GS business segment.

During the third quarter of 2015, we executed an agreement with Bernhard Capital Partners ("BCP") to establish the Brown & Root Industrial Services joint venture in North America which is accounted for within our E&C business segment. In connection with the formation of the joint venture, we contributed our Industrial Services Americas business and received cash consideration of $48 million and a 50% interest in the joint venture. During the fourth quarter of 2016, we contributed an additional $56 million to the joint venture to acquire a turnaround and specialty welding company.

Also during the third quarter of 2015, we acquired a minority interest in EPIC Piping LLC ("EPIC"), a pipe fabrication business, within our E&C business segment. We contributed the majority of our Canadian pipe fabrication and module assembly business to EPIC, excluding certain completed loss projects, and $19 million in cash.

See Note 11 to our consolidated financial statements for more information.

Joint Ventures and Alliances

We enter into joint ventures and alliances with other industry participants in order to reduce exposure and diversify risk, increase the number of opportunities that can be pursued, capitalize on the strengths of each party and provide greater flexibility in delivering our services based on cost and geographical efficiency. Clients of our E&C business segment frequently require EPC contractors to work in teams given the size and complexity of global projects that may cost billions of dollars to complete. Our significant joint ventures and alliances are described below. All joint venture ownership percentages presented are stated as of December 31, 2016.

Aspire Defence Holdings Limited ("Aspire Defence") is a joint venture currently owned by KBR and two financial investors to upgrade and provide a range of services to the British Army’s garrisons at Aldershot and around the Salisbury Plain in the U.K. We own a 45% interest in Aspire Defence and a 50% interest in each of the two joint ventures that provide the construction and related support services to Aspire Defence. The investments are accounted for within our GS business segment using the equity method of accounting.

Affinity is a joint venture between KBR and Elbit Systems to procure, operate and maintain aircraft, and aircraft-related assets over an 18-year contract period, in support of the U.K. Military Flying Training System ("UKMFTS") project. KBR owns a 50% interest in Affinity. In addition, KBR owns a 50% interest in the two joint ventures, Affinity Capital Works and Affinity Flying Services, which provide procurement, operations and management support services under subcontracts with Affinity. The investments are accounted for within our GS business segment using the equity method of accounting.

We are working with JGC, Hatch Associates and Clough Projects Australia for the design, procurement, fabrication, construction, commissioning and testing of the Gorgon Onshore LNG project located on Barrow Island off the northwest coast of Western Australia. We hold a 30% interest in the joint venture which is reported within our E&C business segment and consolidated for financial accounting purposes.

We are working with JGC and Chiyoda for the design, procurement, fabrication, construction, commissioning and testing of the Ichthys Onshore LNG export facility in Darwin, Australia. The project is being executed through two joint ventures in which we own a 30% equity interest. The investments are accounted for within our E&C business segment using the equity method of accounting.

Mantenimiento Marino de Mexico (“MMM”) is a joint venture formed under a Partners Agreement with Grupo R affiliated entities. The Partners Agreement covers five joint venture entities executing Mexican contracts with Petróleos Mexicanos ("PEMEX"). MMM was set up under Mexican maritime law in order to hold navigation permits to operate in Mexican waters. The scope of the business is to render maintenance, repair and restoration services of offshore oil and gas platforms and provisions of quartering in the territorial waters of Mexico. We own a 50% interest in MMM and in each of the four other joint ventures and account for our investment in these entities within our E&C business segment using the equity method of accounting.


8


Brown & Root Industrial Services is a joint venture with BCP and offers maintenance services, turnarounds and small capital expenditure projects, primarily in North America. We own a 50% interest in this joint venture and account for this investment within our E&C business segment using the equity method of accounting.

We have a minority interest in EPIC, in which BCP also holds a controlling interest. We entered into an agreement with EPIC that gives us access to EPIC's pipe fabrication facilities in Louisiana and Texas. We account for our interest in EPIC within our E&C business segment using the equity method of accounting.

Backlog of Unfulfilled Orders

Backlog is our estimate of the U.S. dollar amount of revenues we expect to realize in the future as a result of performing work on contracts. For projects within our unconsolidated joint ventures, we have included our percentage ownership of the joint venture’s estimated revenues in backlog to provide an indication of future work to be performed. Our backlog was $10.9 billion and $12.3 billion at December 31, 2016 and 2015, respectively. We estimate that, as of December 31, 2016, 38% of our backlog will be recognized as revenues within one year. For additional information regarding backlog see our discussion within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II of this Annual Report on Form 10-K.

Contracts

Our contracts are broadly categorized as cost-reimbursable, fixed-price or “hybrid” contracts containing both cost-reimbursable and fixed-price scopes of work. Our fixed-price contracts may include cost escalation and other features that allow for increases in price should certain events occur or conditions change. Change orders on fixed-price contracts are routinely approved as work scopes change resulting in adjustments to our fixed price.

Cost-reimbursable contracts include contracts where the price is variable based upon our actual costs incurred for materials, equipment and for reimbursable labor hours. Profit on cost-reimbursable contracts may be a fixed amount, a mark-up applied to costs incurred or a combination of the two. Cost-reimbursable contracts are generally less risky than fixed-price contracts because the owner/customer retains many of the project risks.

Our GS business segment primarily performs work under cost-reimbursable contracts with the U.S. Department of Defense (“DoD”), U.K. Ministry of Defence ("MoD") and other governmental agencies that are generally subject to applicable statutes and regulations. If the government concludes costs charged to a contract are not reimbursable under the terms of the contract or applicable procurement regulations, these costs are disallowed or, if already reimbursed, we may be required to refund the reimbursed amounts to the customer. Such conditions may also include interest and other financial penalties. If performance issues arise under any of our government contracts, the government retains the right to pursue remedies, which could include termination under any affected contract. Generally, our customers have the contractual right to terminate or reduce the amount of work under our contracts at any time. See “Item 1A. Risk Factors” for more information contained in Part I of this Annual Report on Form 10-K.

Fixed-price contracts, which include unit-rate contracts (essentially a fixed-price contract with the only variable being units of work to be performed), are for a fixed sum to cover all costs and any profit element for a defined scope of work. Fixed-price contracts entail significant risk to us because they require us to predetermine the work to be performed, the project execution schedule and all the costs associated with the work. Although fixed-price contracts involve greater risk than cost-reimbursable contracts, they also are potentially more profitable since the owner/customer pays a premium to transfer project risks to us.

Also within our GS business segment, we participate in Private Finance Initiatives (“PFIs”) contracts, such as the Aspire Defense and UKMFTS projects. PFIs are long-term contracts that outsource the responsibility for the construction, procurement, financing, operation and maintenance of government-owned assets to the private sector. The PFI projects in which KBR participates are located in the U.K. and Ireland with contractual terms ranging from 15 to 35 years and involve the provision of services to various types of assets ranging from acquisition and maintenance of major military equipment and housing to transportation infrastructure. Under most of these PFI arrangements, the primary deliverables of the contracting entity are the initial provision of the asset to the customer and the subsequent provision of operations and maintenance services related to the asset once it is ready for its intended use through the remaining life of the arrangement. The amount of reimbursement from the customer to the contracting entity is negotiated on each contract and varies depending on the specific terms for each PFI.


9


Significant Customers

We provide services to a diverse customer base, including:

•
domestic and foreign governments;
•
international oil companies and national oil companies;
•
independent refiners;
•
petrochemical and fertilizer producers;
•
developers; and
•
manufacturers.

We generated significant revenues from transactions with the U.S. government within our GS business segment and with Chevron Corporation ("Chevron") within our E&C business segment, primarily from a major LNG project in Australia which is nearing completion. No other customers represented 10% or more of consolidated revenues in any of the periods presented. The information in the following table has summarized data related to our revenues from the U.S. government and Chevron.

Revenues and percent of consolidated revenues attributable to major customers by year:
 
Years ended December 31,
Dollars in millions, except percentage amounts
2016
 
2015
 
2014
U.S. government
$
1,090

 
26
%
 
$
378

 
7
%
 
$
321

 
5
%
Chevron
$
105

 
2
%
 
$
523

 
10
%
 
$
1,069

 
17
%

Information relating to our customer concentration is described in “Item 1A. Risk Factors” contained in Part II of this Annual Report on Form 10-K. Also, see further explanations in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" contained in Part II of this Annual Report on Form 10-K.

Raw Materials and Suppliers

Equipment and materials essential to our business are obtained from a variety of sources throughout the world. The principal equipment and materials we use in our business are subject to availability and price fluctuations due to customer demand, producer capacity and market conditions. We monitor the availability and price of equipment and materials on a regular basis. Our procurement department seeks to leverage our size and buying power to ensure that we have access to key equipment and materials at the best possible prices and delivery schedules. While we do not currently foresee any significant lack of availability of equipment and materials in the near term, the availability of these items may vary significantly from year to year and any prolonged unavailability or significant price increases for equipment and materials necessary to our projects and services could have a material adverse effect on our business. See “Item 1A. Risk Factors” contained in Part I of this Annual Report on Form 10-Kfor more information.

Intellectual Property

We have developed, acquired or otherwise have the right to license leading technologies, including technologies held under license from third parties, used for the production of a variety of petrochemicals and chemicals and in the areas of olefins, refining, fertilizers, coal gasification, semi-submersibles and specialty chemicals. We also license a variety of technologies for the transformation of raw materials into commodity chemicals such as phenol used in the production of consumer end products. In addition, we are a licensor of ammonia process technologies used in the conversion of natural gas to ammonia. We also offer technologies for crystallization and evaporation, as well as concentration and purification of strong inorganic acids. We believe our technology portfolio and experience in the commercial application of these technologies and related know-how differentiates us, enhances our margins and encourages customers to utilize our broad range of EPC and construction services.

Our rights to make use of technologies licensed to us are governed by written agreements of varying durations, including some with fixed terms that are subject to renewal based on mutual agreement. Generally, each agreement may be further extended and we have historically been able to renew existing agreements before they expire. We expect these and other similar agreements to be extended so long as it is mutually advantageous to both parties at the time of renewal. However, the majority of our license fees tend to result in a one-time payment per agreement rather than ongoing royalty-type payments. For technologies we own, we protect our rights, know-how and trade secrets through patents and confidentiality agreements. Our expenditures for research and development activities were immaterial in each of the past three fiscal years.


10


Seasonality

Our operations are not generally affected by seasonality. However, weather and natural phenomena can temporarily affect the performance of our services.

Employees

As of December 31, 2016, we had approximately 27,500 employees world-wide, of which approximately 10% were subject to collective bargaining agreements. Additionally, our Brown & Root Industrial Services joint venture employs approximately 9,000 employees. Based upon the geographic diversification of our employees, we believe any risk of loss from employee strikes or other collective actions would not be material to the conduct of our operations taken as a whole.

Worker Health and Safety

We are subject to numerous worker health and safety laws and regulations and value achieving a strong track record of health and safety are fundamental to our culture. In the U.S., these laws and regulations include the Federal Occupational Safety and Health Act and comparable state legislation, the Mine Safety and Health Administration laws, and safety requirements of the Departments of State, Defense, Energy and Transportation of the U.S. government. We are also subject to similar requirements in other countries in which we have extensive operations, including the U.K. where we are subject to the various regulations enacted by the Health and Safety Act of 1974.

These laws and regulations are frequently changing and it is impossible to predict the effect of such laws and regulations on us in the future. In 2015, we embarked on a global Zero Harm initiative in order to reinforce health, safety, security and environment as key components of the KBR culture and lifestyle.  This initiative incorporates three dynamic components: "Zero Harm", "24/7" and "Courage to Care" which empower individuals to take responsibility for their health and safety, as well as that of their colleagues. However, we cannot guarantee that our efforts will always be successful and from time to time we may experience accidents or unsafe work conditions may arise. Our project sites often put our employees and others in close proximity with mechanized equipment, moving vehicles, chemical and manufacturing processes, and highly regulated materials. We actively seek to maintain a safe, healthy and environmentally friendly work place for all of our employees and those who work with us. However, we provide some of our services in high-risk locations and may incur substantial costs to maintain the safety and security of our personnel in these locations.

Environmental Regulation

Our business involves the planning, design, program management, construction and construction management, and operations and maintenance at various project sites, including oil field and related energy infrastructure construction services in and around sensitive environmental areas, such as rivers, lakes and wetlands. Our operations may require us to manage, handle, remove, treat, transport and dispose of toxic or hazardous substances, which are subject to stringent and complex laws relating to the protection of the environment and prevention of pollution.

Significant fines, penalties and other sanctions may be imposed for non-compliance with environmental and worker health and safety laws and regulations, and some laws provide for joint and several strict liabilities for remediation of releases of hazardous substances, rendering a person liable for environmental damage, without regard to negligence or fault on the part of such person. These laws and regulations may expose us to liability arising out of the conduct of operations or conditions caused by others, or for our acts that were in compliance with all applicable laws at the time these acts were performed. For example, there are a number of governmental laws that strictly regulate the handling, removal, treatment, transportation and disposal of toxic and hazardous substances, such as the Comprehensive Environmental Response Compensation and Liability Act of 1980, and comparable national and state laws, that impose strict, joint and several liabilities for the entire cost of cleanup, without regard to whether a company knew of or caused the release of hazardous substances. In addition, some environmental regulations can impose liability for the entire clean-up upon owners, operators, generators, transporters and other persons arranging for the treatment or disposal of such hazardous substances costs related to contaminated facilities or project sites. Other environmental laws applicable to our operations and the operations of our customers include affecting us include, but are not limited to, the Resource Conservation and Recovery Act, the National Environmental Policy Act, the Clean Air Act, the Clean Water Act, the Occupational Safety and the Toxic Substances Control as well as other comparable foreign and state laws. Liabilities related to environmental contamination or human exposure to hazardous substances, comparable foreign and state laws or a failure to comply with applicable regulations could result in substantial costs to us, including cleanup costs, fines and civil or criminal sanctions, third-party claims for property damage or personal injury, or cessation of remediation activities.


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Additional information relating to environmental regulations is described in "Item 1A. Risk Factors” contained in Part I of this Annual Report on Form 10-K and in Note 16 to our consolidated financial statements, and the information discussed therein is incorporated by reference into this Part I, Item 1.

Compliance

Conducting our business with ethics and integrity is a key priority for KBR. We are subject to numerous compliance-related laws and regulations, including the U.S. Foreign Corrupt Practices Act (the "FCPA"), the U.K. Bribery Act, other applicable anti-bribery legislation and laws and regulations regarding trade and exports. We are also governed by our own Code of Business Conduct and other compliance-related corporate policies and procedures that mandate compliance with these laws. Our Code of Business Conduct is a guide for every employee in applying legal and ethical practices to our everyday work. The Code of Business Conduct describes not only our standards of integrity but also some of the specific principles and areas of the law that are most likely to affect our business. We regularly train our employees regarding our Code of Business Conduct and other specific areas including anti-bribery compliance and international trade compliance.

The services we provide to the U.S. federal government are subject to the Federal Acquisition Regulation ("FAR"), the Truth in Negotiations Act, Cost Accounting Standards ("CAS"), the Services Contract Act and DoD security regulations, and many other laws and regulations. These laws and regulations affect how we transact business with our clients and, in some instances, impose additional costs on our business operations.

Website Access

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are made available free of charge on our website at www.kbr.com as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the U.S. Securities and Exchange Commission (the "SEC"). The public may read and copy any materials we have filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains our reports, proxy and information statements and our other SEC filings. The address of that website is www.sec.gov. We have posted on our external website our Code of Business Conduct, which applies to all of our employees and Directors and serves as a code of ethics for our principal executive officer, principal financial officer, principal accounting officer and other persons performing similar functions.

Item 1A. Risk Factors

Risks Related to Operations of our Business

Our results of operations depend on the award of new contracts and the timing of the performance of these contracts.

A portion of our revenues is directly or indirectly derived from new contract awards. Reductions in the number and amounts of new awards, delays in the timing of the 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 frequently involve a lengthy and complex bidding and selection process, which is affected by a number of factors, such as market conditions as well as governmental and environmental approvals. Since 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 contingencies and, as a result, we are subject to the risk that the customer will not be able to secure the necessary financing for the project to proceed.

The uncertainty of our contract award timing can also present difficulties in matching workforce size with contract needs. In some cases, we maintain and bear the cost of a ready workforce that is larger than necessary under existing contracts in anticipation of future workforce needs for expected contract awards. If an expected contract award is delayed or not received, we may incur additional costs resulting from reductions in staff or redundancy of facilities which could have a material adverse effect on our business, financial condition and results of operations.


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If we are unable to attract and retain a sufficient number of affordable trained engineers, craft labor, and other skilled workers, our ability to pursue projects may be adversely affected and our costs may increase.

Our rate of growth and the success of our business depend upon our ability to attract, develop and retain a sufficient number of affordable trained engineers, craft labor and other skilled workers either through direct hire or acquisition of other firms employing such professionals. The market for these professionals is competitive. If we are unable to attract and retain a sufficient number of skilled personnel, our ability to pursue projects may be adversely affected, the costs of executing our existing and future projects may increase and our financial performance may decline.

Dependence on craft labor, subcontractors and equipment manufacturers could adversely affect our profits.

We rely on local craft labor, third-party subcontractors as well as third party equipment manufacturers to complete many of our projects. To the extent that we cannot engage qualified craft labor, subcontractors or acquire equipment or materials in the amounts and at the costs originally estimated, our ability to complete a project in a timely fashion or at a profit may be impaired. If the amount 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. In addition, if a 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.

Some of our U.S. government work requires KBR and certain of its employees to qualify for and retain a government-issued security clearance.

We currently hold a U.S. government-issued facility security clearance and certain of our employees have qualified for and hold U.S. government-issued personal security clearances which are necessary in order to qualify for and ultimately perform certain of our 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 clearance 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 termination of any existing contracts requiring such clearances.

Our use of the percentage-of-completion method of revenue recognition could result in a reduction or reversal of previously recorded revenues and profits.

A portion of our revenues and profits are measured and recognized using the percentage-of-completion 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 ratio of hours performed to date to our estimate of total expected hours at completion, or the physical progress on the project. The effects of revisions to estimated revenues and estimated costs are recorded when the amounts are known or can be reasonably estimated. Such revisions could occur in any period and their effects could be material. The uncertainties inherent in estimating the progress towards completion of long-term engineering, program management, construction management or construction contracts make it possible for actual costs to vary materially from estimates, including reductions or reversals of previously recorded revenues and profits.


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We conduct a portion of our engineering and construction 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 EPC operations through large 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 participants 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 any nonperformance, default or bankruptcy of our joint venture partners, and we typically 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 our customer. We could be liable for both our obligations and those of our partners, which may result in reduced profits or, in some cases, significant losses on the project. Additionally, these factors could have a material adverse effect on the business operations of the joint venture and, in turn, our business operations and reputation.

Operating through joint ventures in which we have a minority interest could result in us having limited control over many decisions made with respect to projects and internal controls relating to projects. These joint ventures may not be subject to the same requirements regarding internal controls and internal control reporting that we follow. As a result, internal control issues may arise, which could have a material adverse effect on our financial condition and results of operations. Additionally, in order to establish or preserve relationships with our joint venture partners, we may agree to risks and contributions of resources that are proportionately greater than the returns we could receive, which could reduce our income and returns on these investments compared to what we may have received if the risks and resources we contributed were always proportionate to our returns.

The nature of our contracts, particularly those that are fixed-price, subjects us to risks associated with cost over-runs, 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. Approximately 16% of the value of our backlog is attributable to fixed-price contracts where we bear a significant portion of the risk of cost over-runs. 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 the time frame and costs committed 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.

The nature of our engineering and construction business exposes us to potential liability claims and contract disputes which may exceed or be excluded from existing insurance coverage.

We engage in engineering and construction 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. When 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.


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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 which may result in additional direct and indirect costs. Often these claims can be the subject of lengthy 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 promptly recover on these types of claims could have a material adverse impact on our liquidity and financial results.

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 Defense Contract Audit Agency (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 KBR is 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 Defense Contract Management Agency ("DCMA"). Should the DCMA determine that we have not complied with the terms of our contract and 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.

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 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 government. Further, the negative publicity that could arise from disagreements with our customers or sanctions as a result thereof could have an adverse effect on our reputation in the industry, reduce our ability to compete for new contracts and may also have a material adverse effect on our business, financial condition, results of operations and cash flows.

International and political events may adversely affect our operations.

A portion of our revenues is derived from foreign operations, which exposes us to risks inherent in doing business in each of the countries where we transact business. The occurrence of any of the risks described below could have a material adverse effect on our business operations and financial performance. With respect to any particular country, these risks may include, but not be limited to:

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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; or
•
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.

Due to the unsettled political conditions in many oil-producing countries and other countries where we provide governmental logistical support, our financial performance is subject to the adverse consequences of war, the effects of terrorism, civil unrest, strikes, currency controls and governmental actions. Our operations are conducted in areas that have significant political risk. In addition, military action or unrest in such locations could restrict the supply of oil and gas, disrupt our operations in such locations and elsewhere and increase our costs related to security worldwide.


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The Referendum of the United Kingdom's Membership of the European Union could adversely affect our revenues and results of operations.

The June 23, 2016 referendum by the British voters to exit the European Union ("Brexit") adversely impacted global markets, including currencies, and resulted in the weakening of the British pound against other currencies. A weaker British pound compared to the U.S. dollar during a reporting period causes local currency results of our U.K. operations and contracts, denominated in the British pound sterling, to be translated into fewer U.S. dollars. This mainly impacts the U.K. portion of our GS business segment where both revenues and costs tend to be denominated in British pounds. Volatility in exchange rates may continue as the U.K. negotiates its exit from the European Union. In the longer term, any impact from Brexit on our international operations will depend, in part, on the outcome of tariff, trade, regulatory and other negotiations and could adversely affect our revenues and results of operations.

Changes in our effective tax rate and tax positions may vary.

        We are subject to income taxes in the U.S. and numerous foreign jurisdictions, many of which are developing countries. 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 a higher tax rate 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 our tax rate could have a material adverse effect on our profitability and liquidity.

We work in international locations where there are high security risks, which could result in harm to our employees and contractors or substantial costs.

Some of our services are performed in high-risk locations, including but not limited to, Iraq, Afghanistan, 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 have and may continue to incur substantial costs to maintain the safety of our personnel. Despite these precautions, we have suffered the loss of employees and contractors that has resulted in claims and litigation. In the future, the safety of our personnel in these and other locations may continue to be at risk, exposing us to the potential loss of additional employees and contractors that could lead to future claims and litigation.

We ship a significant amount of cargo using seagoing vessels exposing us to certain maritime risks.

We execute different projects in remote locations around the world and procure equipment and materials on a global basis. Depending on the type of contract, location, nature of the work and the sourcing of equipment and materials, we may charter seagoing vessels under time and bareboat charter arrangements and assume certain risks typical of those agreements. Such risks may include damage to the ship, liability for cargo and liability which charterers and vessel operators have to third parties “at law.” In addition, we ship a significant amount of cargo and are subject to hazards of the shipping and transportation industry.

Demand for our services provided under government contracts are directly affected by spending by our customers.

We derive a portion of our 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:

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policy or spending changes implemented by the current administration, defense department or other government agencies;
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changes, delays or cancellations of government programs or requirements;
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adoption of new laws or regulations that affect companies providing services to the governments;
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curtailment of the governments’ outsourcing of services to private contractors; or
•
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 and economic and budgetary challenges facing our customers. Potential contract cancellations, 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.

Crude oil and natural gas prices are extremely volatile. A decline in the price of oil and natural gas could adversely affect our results of operations.

Current global economic conditions, including oil and gas price volatility, have reduced and continue to negatively impact our customers' willingness and ability to fund their projects. These conditions reduce customer's revenues and earnings and make it difficult for our customers to accurately forecast and plan future business trends and activities, thereby causing our clients to slow or curtail spending on our services, or seek contract terms more favorable to them.

Our revenues are dependent on capital expenditures for LNG, refining and distribution facilities and other investments by oil and gas companies.  The demand for these facilities and the ability of our customers to obtain capital on attractive terms to finance these projects is also substantially dependent upon crude oil and natural gas prices. These commodities are subject to large fluctuations in response to changes in supply and demand, market uncertainty and a variety of other factors that are beyond our control. Demand for the services we provide could significantly decrease in the event of a sustained reduction in demand for crude oil or natural gas, or a decline in oil and gas prices. Oil and gas companies (our customers) have reduced or deferred their major expenditures due to declines in crude oil and natural gas prices and other market uncertainties. 

Demand for our services depends on demand and capital spending by customers in their target markets, many of which are cyclical in nature.

Demand for many of our services in our commodity-based markets depends on capital spending by oil and natural gas companies, including national and international oil companies, and by industrial companies, which is directly affected by trends in oil, natural gas and commodities prices. Market prices for oil, natural gas and commodities have significantly declined in recent years reducing the revenues and earnings of our customers. As a result, several leading international and national oil companies have reduced capital expenditures. Capital expenditures for refining and distribution facilities by large oil and gas companies have a significant impact on the activity levels of our businesses. Demand for LNG facilities for which we provide services could decrease in the event of a sustained reduction in the price and demand for crude oil or natural gas. Perceptions of longer-term lower oil and natural gas prices by oil and gas companies or longer-term higher material and contractor prices impacting facility costs can similarly reduce or defer major expenditures given the long-term nature of many large-scale projects. Prices of oil, natural gas and commodities are subject to large fluctuations in response to relatively minor changes in supply and demand, market uncertainty and a variety of other factors that are beyond our control. Factors affecting the prices of oil, natural gas and other commodities include, but are not limited to:

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worldwide or regional political, social or civil unrest, military action and economic conditions;
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the level of demand for oil, natural gas, and industrial services;
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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;
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a reduction in energy demand as a result of energy taxation or a change in consumer spending patterns;
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global economic growth or decline;
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the global level of oil and natural gas production;
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global weather conditions and natural disasters;
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oil refining capacity;
•
shifts in end-customer preferences toward fuel efficiency and the use of natural gas;
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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
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reduction in demand for the commodity-based markets in which we operate.


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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, 2016, our backlog was approximately $10.9 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 and the timing of the revenues and profits that we actually 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.

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 we compete in. 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.

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 has also favored 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 have supplier relationships and delivery systems in place to react to emerging needs. We face rigorous competition and pricing pressures for any additional contract awards from the U.S. government, and we may be required to qualify or continue to qualify under the various multiple award task order contract criteria. It may be more difficult for us to win future awards from the U.S. government and we may have other contractors sharing in any U.S. government awards that we win. In addition, negative publicity regarding findings stemming from audits by the DCAA, congressional investigations and litigation may adversely affect our ability to obtain future awards.

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.

While we provide services to a diverse customer base, including international and national oil and gas companies, independent refiners, petrochemical producers, fertilizer producers and domestic and foreign governments, a considerable percentage of our revenues is generated from transactions with certain significant customers. Revenues from the U.S. government represented 26% of our total consolidated revenues for the year ended December 31, 2016. The loss of our significant customers, or the cancellation or delay in their projects, could adversely affect our revenues and results of operations.


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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. Since we license technologies from third parties, there is a risk that our relationships with licensors may terminate, expire or be interrupted or harmed. In some, but not all cases, we may be able to obtain the necessary intellectual property rights from alternative sources. 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.

Our current business strategy includes the possibility of 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:

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valuation methodologies may not accurately capture the value proposition;
•
future completed acquisitions may not be integrated within our operations with the efficiency and effectiveness initially expected, 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 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. Moreover, to the extent an acquisition results in additional goodwill, it will reduce our tangible net worth, which might have an adverse effect on our credit capacity.

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 rely heavily on IT systems in order to achieve our business objectives.  We also rely upon industry accepted security measures and technology to secure 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, cyber-attacks, other malicious activities from unauthorized 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, processing inefficiencies, downtime, litigation and the loss of suppliers or customers. We have experienced security threats in the past, none of which we considered to be significant to our business or results of operations, but future significant disruptions or failures could have a material adverse effect on our business operations, financial performance and financial condition.


19


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, 2016, we had $959 million of goodwill and $248 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. If our market capitalization drops significantly below the amount of net equity recorded on our balance sheets, it might indicate a decline in our fair value and would require us to further evaluate whether our goodwill has been impaired. We perform an annual and an interim analysis, as appropriate, of our goodwill to determine if it has become impaired. The analysis requires us to make assumptions in estimates of fair value of our reporting units. If actual results are significantly different from the estimates, we may be required to write down the impaired portion of goodwill. An impairment of all or a part of our goodwill or intangible assets could have a material adverse effect on our net earnings and net worth.

Our reorganization activities may not achieve the results we expect, which could materially and adversely affect our results of operations and financial condition.

In 2014, we announced and implemented reorganization activities, which included the decision to no longer bid on certain types of work and exit certain non-strategic businesses. This decision resulted in a significant reduction in our forecasts of future cash flows for three of our previous reporting units and triggered a goodwill impairment test. There can be no assurance that our reorganization activities will produce the long-term benefits we anticipate.

Risks Related to Governmental Regulations and Law

We could be adversely impacted if we fail to comply with international export and domestic laws, which are the subject of rigorous enforcement 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 upon us 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 make us lose our status as an eligible U.S. government contractor and cause us to suffer serious harm to our reputation. Any suspension or termination of our U.S. government contractor status could have a material adverse effect on our business, financial condition or results of operations.

We are subject to anti-bribery laws in the U.S. and other jurisdictions, violations of which could 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.


20


Our work sites are inherently dangerous and we are subject to various environmental, 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 incur significant costs and penalties that could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our work sites often expose our employees and others to chemical and manufacturing processes, large pieces of mechanized equipment, and moving vehicles. 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, local, and 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 is 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.

We may be affected by market or regulatory responses to climate change.

        Continued attention to issues concerning climate change 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 emit greenhouse gases through the mining, manufacture, utilization or production of materials or goods. Such legislation or restrictions could increase the costs of projects for us and our clients or, in some cases, prevent a project from going forward, thereby potentially reducing the need for our services which 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.

Risks Related to Financial Conditions and Markets

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. If adequate credit or funding is not available, or is not available on terms satisfactory to us, there could be 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.

21


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 Credit Agreement (as defined below) 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 liquidity crisis 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 Credit Agreement 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. However, 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. If our joint ventures or partners fail to perform, we could suffer negative results. In addition, future projects may require us to obtain letters of credit that extend beyond the term of our current Credit Agreement. 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 Credit Agreement imposes restrictions that limit our operating flexibility and may result in additional expenses, and this credit agreement may not be available if financial covenants are violated or if an event of default occurs.

Our Credit Agreement provides a credit line up to $1 billion and matures in September 2020 (our "Credit Agreement"). 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 ratio of consolidated debt to consolidated EBITDA and a minimum consolidated net worth, all as defined in the Credit Agreement.

A breach of any covenant or our inability to comply with the required financial ratios could result in a default under our Credit Agreement, 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 Credit Agreement when due, our lenders could proceed against the guarantees of our major domestic subsidiaries. If any future indebtedness under our Credit Agreement is accelerated, we can provide no assurance that our assets would be sufficient to repay such indebtedness in full.


22


Our debt levels have increased as a result of our recent acquisitions.

Our increased debt levels and related debt service obligations could have negative consequences, including:

•
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 Credit Agreement.

Provisions in our charter documents, Delaware law and our Credit Agreement may inhibit a takeover or impact operational control which 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 Credit Agreement contains a default provision that is triggered upon a change in control of at least 25%, which would impede a takeover and/or make a takeover more costly.

We are subject to foreign exchange and currency risks that could adversely affect our operations and our ability to reinvest earnings from operations. Our ability to mitigate our foreign exchange risk through hedging transactions may be limited.

We generally attempt to denominate our contracts in U.S. Dollars or in the currencies of our costs. However, we do enter into contracts that subject us to currency risk exposure, primarily when our contract revenues are denominated in a currency different from the contract costs. A portion of our consolidated revenues and consolidated operating expenses are in foreign currencies. As a result, we are subject to foreign currency risks, including risks resulting from changes in currency exchange rates and limitations on our ability to reinvest earnings from operations in one country to fund the financing requirements of our operations in other countries.

The governments of certain countries have or may in the future impose restrictive exchange controls on local currencies and it may not be possible for us to engage in effective hedging transactions to mitigate the risks associated with fluctuations of a particular currency. We are often required to pay all or a portion of our costs associated with a project in the local currency. As a result, we generally attempt to negotiate contract terms with our customer, who is often affiliated with the local government, or has a significant local presence, to provide that we are only paid in the local currency for amounts that match our local expenses. If we are unable to match our local currency costs with revenues in the local currency, we would be exposed to the risk of adverse changes in currency exchange rates.

If we need to sell or issue additional common shares to refinance existing debt or to finance future acquisitions, our existing shareholder ownership could be diluted.

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 acquiring and merging of complementary businesses. To successfully fund and complete such potential acquisitions, we may issue additional equity securities that may result in dilution of our existing shareholder ownership's earnings per share.


23


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 which may not be under our control. As a result, we could sustain a loss on our equity investment in these projects.

Item 1B. Unresolved Staff Comments

None.


24


Item 2.Properties
We own or lease the following major properties in domestic and foreign locations:
Location
 
Owned/Leased
 
Description
 
Business Segment
North America:
 
 
 
 
 
 
 
 
 
 
 
 
 
Arlington, Virginia
 
Leased
 
Office facilities
 
Government Services
 
 
 
 
 
 
 
Birmingham, Alabama
 
Leased
 
Office facilities
 
Engineering & Construction
 
 
 
 
 
 
 
Colorado Springs, Colorado
 
Leased
 
Office facilities
 
Government Services
 
 
 
 
 
 
 
Columbia, Maryland
 
Leased
 
Office facilities
 
Government Services
 
 
 
 
 
 
 
Huntsville, Alabama
 
Leased
 
Office facilities
 
Government Services
 
 
 
 
 
 
 
Houston, Texas
 
Leased
 
Office facilities
 
All
 
 
 
 
 
 
 
Monterrey, Nuevo Leon, Mexico
 
Leased
 
Office facilities
 
Engineering & Construction
 
 
 
 
 
 
 
Newark, Delaware
 
Leased
 
Office facilities
 
Engineering & Construction
 
 
 
 
 
 
 
Europe, Middle East and Africa:
 
 
 
 
 
 
 
 
 
 
 
 
 
Leatherhead, United Kingdom
 
Owned
 
Office facilities
 
All
 
 
 
 
 
 
 
Al Khobar, Saudi Arabia
 
Leased
 
Office facilities
 
Engineering & Construction
 
 
 
 
 
 
 
Asia-Pacific:
 
 
 
 
 
 
 
 
 
 
 
 
 
Singapore
 
Leased
 
Office facilities
 
Engineering & Construction
 
 
 
 
 
 
 
South Brisbane, Australia
 
Leased
 
Office facilities
 
Engineering & Construction
 
 
 
 
 
 
 
Sydney, Australia
 
Leased
 
Office facilities
 
Engineering & Construction
 
 
 
 
 
 
 
Perth, Australia
 
Leased
 
Office and project facilities
 
Technology & Consulting and Engineering & Construction
 
 
 
 
 
 
 
Chennai, India
 
Leased
 
Office and project facilities
 
All

We also own or lease numerous small facilities that include sales offices and project offices throughout the world and lease office space in other buildings owned by unrelated parties. Our owned 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.


25


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.


26


PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the New York Stock Exchange under the symbol “KBR.” The following table sets forth, on a per share basis for the periods indicated, the high and low sales prices for our common stock as reported by the New York Stock Exchange and dividends declared. In the fourth quarter of 2016, we declared a dividend of $0.08 per share on October 25, 2016.
 
 
Common Stock Price Range
 
Dividends
Declared
Per Share
 
 
High
 
Low
 
Fiscal Year 2016
 
 
 
 
 
 
First quarter ended March 31, 2016
 
$
17.10

 
$
11.60

 
$
0.08

Second quarter ended June 30, 2016
 
$
15.92

 
$
12.08

 
$
0.08

Third quarter ended September 30, 2016
 
$
15.89

 
$
12.69

 
$
0.08

Fourth quarter ended December 31, 2016
 
$
17.95

 
$
13.16

 
$
0.08

Fiscal Year 2015
 
 
 
 
 
 
First quarter ended March 31, 2015
 
$
18.35

 
$
14.00

 
$
0.08

Second quarter ended June 30, 2015
 
$
20.77

 
$
14.30

 
$
0.08

Third quarter ended September 30, 2015
 
$
19.65

 
$
15.64

 
$
0.08

Fourth quarter ended December 31, 2015
 
$
19.94

 
$
16.34

 
$
0.08

At January 31, 2017, there were 100 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, which replaced and terminated the August 26, 2011 share repurchase program. The authorization does not obligate the Company to acquire any particular number of common shares 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 and the authorization does not have an expiration date.
Under our Credit Agreement, we are permitted to repurchase our equity shares provided that no such repurchases shall be made from the proceeds borrowed under the Credit Agreement and that the aggregate purchase price and dividends paid after September 25, 2015 does not exceed the Distribution Cap. As of December 31, 2016, the remaining availability under the Distribution Cap was approximately $652 million. The declaration, payment or increase of any future dividends will be at the discretion of our Board of Directors and will depend upon, among other things, future earnings, general financial condition and liquidity, success in business activities, capital requirements and general business conditions. Since January 2007, we have repurchased $797 million of our outstanding common stock and have paid $332 million in dividends.

The following is a summary of share repurchases of our common stock settled during the three months ended December 31, 2016 and the amount available to be repurchased under the authorized share repurchase program:
Purchase Period
Total Number
of Shares
Purchased (1)
 
Average
Price Paid
per Share
 
Total Number  of
Shares  Purchased
as Part of  Publicly
Announced Plan
 
Dollar Value of Maximum Number of Shares that May Yet Be
Purchased Under the Plan
October 1 – 31, 2016
29,916

 
$
14.90

 
—

 
$
208,030,228

November 1 – 30, 2016
226

 
$
16.99

 
—

 
$
208,030,228

December 1 – 31, 2016
58,596

 
$
17.55

 
—

 
$
208,030,228

  
 
(1)
The shares reported herein consist solely of shares acquired from employees in connection with the settlement of income tax and related benefit withholding obligations arising from issuance of share-based equity awards under the KBR Stock and Incentive Plan. A total of 88,738 shares were acquired from employees during the three months ended December 31, 2016 at an average price of $16.66 per share.


27


Performance Graph

The chart below compares the cumulative total shareholder return on shares of our common stock for the five-year period ended December 31, 2016, with the cumulative total return on the Dow Jones Heavy Construction Industry Index and the Russell 1000 Index for the same period. The comparison assumes the investment of $100 on December 31, 2011 and reinvestment of all dividends. The shareholder return is not necessarily indicative of future performance.
kbr1231201_chart-05444a02a04.jpg

 
12/31/2011
 
12/31/2012
 
12/31/2013
 
12/31/2014
 
12/31/2015
 
12/31/2016
KBR
$
100.00

 
$
108.09

 
$
115.21

 
$
61.24

 
$
61.13

 
$
60.30

Dow Jones Heavy Construction
$
100.00

 
$
120.81

 
$
157.90

 
$
116.99

 
$
102.82

 
$
125.91

Russell 1000
$
100.00

 
$
113.92

 
$
148.60

 
$
165.05

 
$
163.25

 
$
179.08



28


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,
Dollars in millions, except per share amounts
 
2016
 
2015
 
2014
 
2013
 
2012
Statements of Operations Data:
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
4,268

 
$
5,096

 
$
6,366

 
$
7,214

 
$
7,770

Gross profit (loss)
 
112

 
325

 
(65
)
 
417

 
518

Equity in earnings of unconsolidated affiliates
 
91

 
149

 
163

 
137

 
151

Impairment of goodwill, asset impairments and restructuring charges (a)
 
(39
)
 
(70
)
 
(660
)
 
—

 
(180
)
Operating income (loss) (b)
 
28

 
310

 
(794
)
 
308

 
299

Net income (loss) (c)
 
(51
)
 
226

 
(1,198
)
 
171

 
202

Net income attributable to noncontrolling interests
 
(10
)
 
(23
)
 
(64
)
 
(96
)
 
(58
)
Net income (loss) attributable to KBR
 
(61
)
 
203

 
(1,262
)
 
75

 
144

Basic net income (loss) attributable to KBR per share
 
$
(0.43
)
 
$
1.40

 
$
(8.66
)
 
$
0.50

 
$
0.97

Diluted net income (loss) attributable to KBR per share
 
$
(0.43
)
 
$
1.40

 
$
(8.66
)
 
$
0.50

 
$
0.97

Cash dividends declared per share
 
$
0.32

 
$
0.32

 
$
0.32

 
$
0.24

 
$
0.28

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (as of the end of period):
 
 
 
 
 
 
 
 
 
 
Total assets (d)
 
$
4,144

 
$
3,412

 
$
4,078

 
$
5,422

 
$
5,752

Long-term nonrecourse project-finance debt
 
34

 
51

 
63

 
78

 
84

Long-term revolving credit agreement debt
 
650

 
—

 
—

 
—

 
—

Total shareholders’ equity
 
$
745

 
$
1,052

 
$
935

 
$
2,439

 
$
2,511

 
 
 
 
 
 
 
 
 
 
 
Other Financial Data (as of the end of period):
 
 
 
 
 
 
 
 
 
 
Backlog of unfulfilled orders (e)
 
$
10,938

 
$
12,333

 
$
10,859

 
$
14,118

 
$
14,931

 

(a)
Included in 2016 and 2015 are asset impairment and restructuring charges of $39 million and $70 million, respectively. The 2014 balance includes a goodwill impairment charge of $446 million related to three of our previous reporting units, long-lived assets impairment charge of $171 million and restructuring charges of $43 million. Included in 2012 is a goodwill impairment charge of $178 million related to one of our previous reporting units and a $2 million long-lived asset impairment charge.
(b)
Includes gains on disposal of assets of $7 million, $61 million, $7 million, $2 million and $32 million for the years ended 2016, 2015, 2014, 2013, and 2012, respectively.
(c)
Included in 2014 is $421 million of tax expense primarily related to valuation allowance on U.S. federal, foreign and state net operating loss carryforwards, foreign tax credit carryforwards, other deferred tax assets and foreign tax expense.
(d)
The impact of adopting Accounting Standards Update ("ASU") 2015-17 resulted in a decrease in total assets of $121 million, $16 million, and $15 million for the years ended 2014, 2013 and 2012, respectively.
(e)
Prior to the second quarter of 2015, the amount included in backlog for long-term contracts associated with the U.K. government's PFIs was limited to five years. In the second quarter of 2015, we modified our backlog policy to record the estimated value of all work forecasted to be performed under these arrangements.

29


Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Management’s discussion and analysis (“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.

Business Environment

Our portfolio includes highly specialized mission and logistics support solutions, engineering services, process technologies, energy project technical consulting, program management, construction, asset life-cycle solutions and other related services. We provide these services to various international and domestic governmental agencies and a wide range of customers across the hydrocarbons value chain. The demand for our services depends on the level of capital and operating expenditures of our customers, which is often considered alongside prevailing market conditions and the availability of resources to support and fund projects. Significant volatility in commodity prices has resulted in many of our oil and gas customers taking steps to defer, suspend or terminate capital expenditures which result in delayed or reduced volumes of business for us.

We expect continued opportunities within our global government services business as we drive higher value and lower cost solutions to support governments’ increasing training, operation, maintenance and sustainment requirements. The acquisition of Wyle Inc. ("Wyle") and Honeywell Technology Solutions Inc. ("HTSI"), which we have converted to KBRwyle Technology Solutions, LLC ("KTS") in the third quarter of 2016 moves KBR’s GS business into the domestic high value engineering services industry for such clients as NASA and U.S. government military agencies. International tensions are also likely to contribute to increased demand for our international military support services.

Upstream oil projects have experienced the largest reductions in capital expenditures, as the effect of volatile oil prices has been more pronounced in this sector. We continue to see opportunities in the hydrocarbons market, including midstream gas projects such as LNG to satisfy future demand, particularly at locations where major supporting infrastructure already exists (i.e. near existing gas pipelines and electric power grids, port facilities, etc.). Additionally, the downstream sector, which generally benefits from low feedstock prices, should also be positively impacted. We seek to collaborate with our customers in developing these prospects by using integrated teams, from project conceptualization and technical solutions selection through project award and implementation.

We believe KBR has a balanced portfolio of recurring government services outsourcing opportunities as well as upstream, midstream and downstream solutions.

Overview of Financial Results

While the financial results were lower than our expectations in 2016, we were successful from a long-term strategic perspective with efforts to expand our government services offering and our Brown & Root Industrial Services model as well as broaden our technology portfolio. During the year, we acquired two significant, well established and highly technical government services companies and three smaller technology driven entities. Through our Brown & Root Industrial Services joint venture in North America, we acquired a turnaround and specialty welding company. All of these acquisitions are part of our strategy to pivot the company to become a global leader in differentiated professional services in the Government Services and Global Hydrocarbons industries. These businesses have historically provided stable earnings and cash flows which we expect will reduce volatility of our financial results associated with large EPC projects traditionally executed by our E&C business segment. The steady earnings and cash flows from these acquisitions also provide us with the financial flexibility to be selective in determining which EPC sales prospects we pursue in the future. As a result, we expect more than fifty percent of our 2017 revenues to come from our GS business segment which tends to have a large percentage of its work being executed under smaller reimbursable type contracts. Finally, we made significant progress in completing our last domestic EPC power project which is the final step in exiting this non-strategic business.


30


Revenues
 
 
 
 
 
2016 vs. 2015
 
 
 
2015 vs. 2014
Dollars in millions
2016
 
2015
 
$
 
%
 
2014
 
$
 
%
Revenues
$
4,268

 
$
5,096

 
$
(828
)
 
(16
)%
 
$
6,366

 
$
(1,270
)
 
(20
)%

The decrease in consolidated revenues in 2016 was primarily driven by lower activity on our two LNG projects in Australia one of which was substantially completed at the end of 2016 as well as reduced activities on two ammonia projects in the U.S. The reduction in activities on these four projects resulted in combined lower revenues of approximately $759 million. Revenues declined by $367 million related to the deconsolidation of our Industrial Services Americas business that was contributed in the formation of the unconsolidated Brown & Root Industrial Services joint venture in North America and another $178 million as a result the sale of the Building Group and Infrastructure Americas businesses in 2015. Lower activity on fixed-price EPC power projects nearing completion in 2015 within our Non-strategic Business segment also contributed to the decrease. These revenue decreases were partially offset by the expansion of existing U.S government contracts, revenues generated by the newly acquired Wyle and KTS and a favorable settlement with the U.S. government regarding reimbursement of previously expensed legal fees and interest incurred related to the sodium dichromate case within our GS business segment. Revenues increased by $64 million due to closeout activities on an LNG project in Africa within our E&C business segment. Revenue in our T&C business segment was favorably impacted by new acquisitions and higher proprietary equipment sales.

Consolidated revenues in 2015 decreased primarily due to reduced activity within our E&C business segment on one of our major LNG projects in Australia that was nearing completion. The decrease in revenues was also attributable to the completion or substantial completion of several projects in the U.S., Middle East and Canada. The contribution of our Industrial Services Americas business to an unconsolidated joint venture in the third quarter of 2015 resulted in decreased revenues of $126 million as compared to 2014. These decreases were partially offset by increased work or ramp up on various chemicals and ammonia projects in the U.S. and a new oil and gas project in Europe. Our revenues were negatively impacted by activity within our Non-strategic Business segment, including the reduction of $141 million of revenues related to the sale of two businesses and the wind-down of two fixed-price EPC power projects that were nearing completion in 2015. In addition, proprietary equipment sales and awards of new consulting contracts from upstream oil related projects declined within our T&C business segment contributed to the decrease.

Gross Profit (Loss)
 
 
 
 
 
2016 vs. 2015
 
 
 
2015 vs. 2014
Dollars in millions
2016
 
2015
 
$
 
%
 
2014
 
$
 
%
Gross profit (loss)
$
112

 
$
325

 
$
(213
)
 
(66
)%
 
$
(65
)
 
$
390

 
600
%

The decrease in consolidated gross profit in 2016 was primarily due to reduced activity as a result of the completion or substantial completion of several projects, including one of our LNG projects in Australia, and the contribution of our Industrial Services Americas business to an unconsolidated joint venture discussed above. Increased costs estimates to complete several U.S. projects in our E&C business segment led to further declines in gross profit and included a decrease of $114 million resulting from an unforeseen equipment failure and other items during plant start-up on an EPC ammonia project and $112 million resulting from cost increases on a downstream EPC project due to significant weather delays and lower than expected construction productivity rates. In our Non-strategic business segment, an increase in subcontractor costs as a result of lower than anticipated productivity on a power project also negatively impacted consolidated gross profit for the period. Consolidated gross profit was positively impacted by increased activity from new awards, expansions on existing U.S. government contracts, settlement of the sodium dichromate legal matter with the U.S. government, results from the recent acquisitions within our GS business segment and the settlement on closeout of an LNG project in Africa within our E&C business segment discussed above.

The increase in consolidated gross profit in 2015 was primarily due to losses and charges that were recognized during 2014 on projects within our E&C and Non-strategic Business segments. Gross profit was also impacted by the recognition of favorable settlements in the third quarter of 2015 within our Non-strategic Business segment, ongoing execution on base operations and other contracts within our GS business segment and reduced overhead spending within our E&C business segment. This increase was partially offset by the reduced activity on the major LNG project discussed above.


31


Equity in Earnings of Unconsolidated Affiliates
 
 
 
 
 
2016 vs. 2015
 
 
 
2015 vs. 2014
Dollars in millions
2016
 
2015
 
$
 
%
 
2014
 
$
 
%
Equity in earnings of unconsolidated affiliates
$
91

 
$
149

 
$
(58
)
 
(39
)%
 
$
163

 
$
(14
)
 
(9
)%

The decrease in equity in earnings of unconsolidated affiliates in 2016 was primarily due to lower progress and increased reimbursable cost estimates on an LNG project joint venture in Australia within our E&C business segment that reduced the percentage of completion and delays profit to future periods (See "Changes in Project-related Estimates" within the Results of Operations section for further discussion). Also, within our E&C business segment, we benefited from a $15 million favorable adjustment in 2015 to correct transactions between unconsolidated affiliates associated with our offshore maintenance joint venture in Mexico that did not recur in 2016.

The decrease in equity in earnings of unconsolidated affiliates in 2015 was primarily due to an insurance recovery and reduced costs on a joint venture project within our GS business segment in 2014 that did not recur in 2015 as well as a reduction in volume due to the substantial completion of construction activities on this project during 2015. This decrease was offset by increased earnings due to a correction on our offshore maintenance joint venture in Mexico in our E&C business segment as noted above.

General and Administrative Expenses
 
 
 
 
 
 
 
 
 
 
 
 
2016 vs. 2015
 
 
 
2015 vs. 2014
Dollars in millions
2016
 
2015
 
$
 
%
 
2014
 
$
 
%
General and administrative expenses
$
(143
)
 
$
(155
)
 
$
(12
)
 
(8
)%
 
$
(239
)
 
$
(84
)
 
(35
)%

The decrease in general and administrative expenses in 2016 was primarily due to reduced overhead costs resulting from continued headcount reductions and other cost savings initiatives implemented throughout 2015 and 2016, partially offset by a $7 million increase due to the acquisition of Wyle and HTSI in 2016. General and administrative expenses in 2016 included $88 million related to corporate activities and $55 million related to the business segments.

The decrease in general and administrative expenses in 2015 was primarily due to lower information technology support costs resulting from the cancellation of our enterprise resource planning ("ERP") implementation project in the fourth quarter of 2014, reduced overhead costs resulting from headcount reductions and other cost savings initiatives implemented at the end of 2014 and during 2015. General and administrative expenses in 2015 included $113 million related to corporate activities and $42 million related to the business segments.

Impairment and Restructuring Charges
 
 
 
 
 
 
 
 
 
 
 
 
2016 vs. 2015
 
 
 
2015 vs. 2014
Dollars in millions
2016
 
2015
 
$
 
%
 
2014
 
$
 
%
Impairment of goodwill
$
—

 
$
—

 
$
—

 
—%
 
$
(446
)
 
$
(446
)
 
(100
)%
Asset impairment and restructuring charges
$
(39
)
 
$
(70
)
 
$
(31
)
 
(44
)%
 
$
(214
)
 
$
(144
)
 
(67
)%

Asset impairment and restructuring charges in 2016 includes $21 million in charges associated with impairments of leasehold improvements and lease terminations within our E&C and Other business segments. Additionally, we recognized $18 million of additional severance costs associated with workforce reduction efforts during the year primarily within our E&C business segment.

Asset impairment and restructuring charges in 2015 reflects $22 million of charges within our E&C and Other business segments to write off the remaining portion of one of our ERP assets which we abandoned during the year. We also recognize $21 million in charges for impairments of leasehold improvements and lease termination costs associated with lease terminations during 2015 within our E&C and Other business segments. Within our E&C and T&C business segments, we recognized severance costs of $27 million as the result of workforce reduction efforts primarily related to our announcement at the end of 2014.

In 2014, we recognized goodwill impairment of $446 million related to the remaining goodwill associated with our Roberts and Schaefer ("R&S") and BE&K, Inc. acquisitions as a result of our decision to exit related businesses and the continued business decline in certain markets.

32



Asset impairment and restructuring charges in 2014 reflects the impairment of $135 million for a portion of our ERP project we did not expect would provide us any future benefits, the recognition of a $31 million impairment of R&S intangible assets and $19 million of charges related to impairment of leasehold improvements and costs associated with terminated leases and other properties. We also recognized $29 million of severance charges as a result of workforce reductions.

See Notes 10 to our consolidated financial statements for further discussion on asset impairment and restructuring charges.

Gain on Disposition of Assets
 
 
 
 
 
 
 
 
 
 
 
 
2016 vs. 2015
 
 
 
2015 vs. 2014
Dollars in millions
2016
 
2015
 
$
 
%
 
2014
 
$
 
%
Gain on disposition of assets
$
7

 
$
61

 
$
(54
)
 
(89
)%
 
$
7

 
$
54

 
771
%

The gain on disposition of assets in 2016 primarily reflects working capital adjustments in the first quarter of 2016 associated with the sale of our Infrastructure Americas business within our Non-strategic Business segment.

The gain on disposition of assets in 2015 primarily reflects the gain recognized on the sale of our U.K. office location within our E&C business segment and our Infrastructure Americas business within our Non-strategic Business segment. This also includes the gain recognized in our E&C business segment for the deconsolidation and transfer of our Industrial Services Americas business to the Brown & Root Industrial Services joint venture in North America and the sale of our Building Group subsidiary within our Non-strategic Business segment in the second quarter. See Notes 3 and 11 to our consolidated financial statements for additional information.

Non-operating Income
 
 
 
 
 
 
 
  
 
 
 
 
2016 vs. 2015
 
 
 
2015 vs. 2014
Dollars in millions
2016
 
2015
 
$
 
%
 
2014
 
$
 
%
Non-operating income
$
5

 
$
2

 
$
3

 
150
%
 
$
17

 
$
(15
)
 
(88
)%

Non-operating income includes interest income, interest expense, foreign exchange gains and losses and other non-operating income or expense items. The increase in non-operating income in 2016 compared to 2015 was primarily due to the strengthening of the U.S. dollar against the majority of our foreign currencies. This increase was partially offset by an increase in interest expense related to borrowings under our credit agreement.

The decrease in non-operating income in 2015 was primarily due to the gain on a negotiated settlement with our former parent as well as the reversal of associated interest under a tax sharing agreement recognized in 2014 that did not recur in 2015. Also contributing to operating income were foreign exchange gains of $9 million in 2015 due to the strengthening of the U.S. dollar against the majority of our foreign currencies compared to losses in 2014.

Provision for Income Taxes
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
2016 vs. 2015
 
 
 
2015 vs. 2014
Dollars in millions
2016
 
2015
 
$
 
%
 
2014
 
$
 
%
Income (loss) before provision for income taxes
$
33

 
$
312

 
$
(279
)
 
(89)%
 
$
(777
)
 
$
1,089

 
140%
Provision for income taxes
$
(84
)
 
$
(86
)
 
$
(2
)
 
(2)%
 
$
(421
)
 
$
(335
)
 
(80)%

Provision for income taxes in 2016 and 2015 consists primarily of $87 million and $77 million, respectively, on our foreign earnings. The provision for income taxes in 2016 is impacted by $343 million of project losses in the U.S. for which we recognize no tax benefit.


33


The decrease in provision for income taxes in 2015 compared to 2014 was primarily due to the absence of the nondeductible goodwill impairment loss, the increase in our valuation allowance for deferred tax assets and the recognition of taxes on undistributed earnings which increased 2014 income taxes.

A reconciliation of our effective tax rates for 2016, 2015 and 2014 to the U.S. statutory federal rate is presented in Note 14 to our consolidated financial statements.

Net Income Attributable to Noncontrolling Interests
  
 
 
 
 
2016 vs. 2015
 
 
 
2015 vs. 2014
Dollars in millions
2016
 
2015
 
$
 
%
 
2014
 
$
 
%
Net income attributable to noncontrolling interests
$
(10
)
 
$
(23
)
 
$
(13
)
 
(57
)%
 
$
(64
)
 
$
(41
)
 
(64
)%

The decreases in net income attributable to noncontrolling interests in 2016 compared to 2015 and 2015 compared to 2014 were due to reduced joint venture earnings resulting from lower activity on our major LNG project in Australia in our E&C business segment.


34


Results of Operations by Business Segment

We analyze the financial results for each of our five business segments. The business segments presented are consistent with our reportable segments discussed in Note 2 to our consolidated financial statements.

Years Ended December 31,
  
 

 

2016 vs. 2015

 

2015 vs. 2014
Dollars in millions
2016

2015

$

%

2014

$

%
Revenues
 
 
 
 
 
 
 
 
 
 
 
Government Services
$
1,359

 
$
663

 
$
696

 
105
 %
 
$
638

 
$
25

 
4
 %
Technology & Consulting
347

 
324

 
23

 
7
 %
 
353

 
(29
)
 
(8
)%
Engineering & Construction
2,352

 
3,454

 
(1,102
)
 
(32
)%
 
4,584

 
(1,130
)
 
(25
)%
  Other
—

 
—

 
—

 
—
 %
 
—

 
—

 
—
 %
Subtotal
$
4,058

 
$
4,441

 
$
(383
)
 
(9
)%
 
$
5,575

 
$
(1,134
)
 
(20
)%
Non-strategic Business
210

 
655

 
(445
)
 
(68
)%
 
791

 
(136
)
 
(17
)%
Total
$
4,268

 
$
5,096

 
$
(828
)
 
(16
)%
 
$
6,366

 
$
(1,270
)
 
(20
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
Government Services
$
137

 
$
(3
)
 
140

 
n/m

 
$
(32
)
 
$
29

 
91
 %
Technology & Consulting
73

 
77

 
(4
)
 
(5
)%
 
53

 
24

 
45
 %
Engineering & Construction
7

 
224

 
(217
)
 
(97
)%
 
141

 
83

 
59
 %
Other
—

 
—

 
—

 
—
 %
 
—

 
—

 
—
 %
Subtotal
$
217

 
$
298

 
$
(81
)
 
(27
)%
 
$
162

 
$
136

 
84
 %
Non-strategic Business
(105
)
 
27

 
(132
)
 
(489
)%
 
(227
)
 
254

 
112
 %
Total
$
112

 
$
325

 
$
(213
)
 
(66
)%
 
$
(65
)
 
$
390

 
n/m

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated affiliates
 
 
 
 
 
 
 
 
Government Services
$
39

 
$
45

 
$
(6
)
 
(13
)%
 
$
73

 
$
(28
)
 
(38
)%
Technology & Consulting
—

 
—

 
—

 
—
 %
 
—

 
—

 
—
 %
Engineering & Construction
52

 
104

 
(52
)
 
(50
)%
 
90

 
14

 
16
 %
Other
—

 
—

 
—

 
—
 %
 
—

 
—

 
—
 %
Subtotal
$
91

 
$
149

 
$
(58
)
 
(39
)%
 
$
163

 
$
(14
)
 
(9
)%
Non-strategic Business
—

 
—

 
—

 
—
 %
 
—

 
—

 
—
 %
Total
$
91

 
$
149

 
$
(58
)
 
(39
)%
 
$
163

 
$
(14
)
 
(9
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total general and administrative expense
$
(143
)
 
$
(155
)
 
$
(12
)
 
(8
)%
 
$
(239
)
 
$
(84
)
 
(35
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impairment of goodwill
$
—

 
$
—

 
$
—

 
—
 %
 
$
(446
)
 
$
(446
)
 
(100
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset impairment and restructuring charges
$
(39
)
 
$
(70
)
 
$
(31
)
 
(44
)%
 
$
(214
)
 
$
(144
)
 
(67
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain on disposition of assets
$
7

 
$
61

 
$
(54
)
 
(89
)%
 
$
7

 
$
54

 
771
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total operating income (loss)
$
28

 
$
310

 
$
(282
)
 
(91
)%
 
$
(794
)
 
$
1,104

 
139
 %
 
n/m - not meaningful


35


Government Services

GS revenues increased by $696 million, or 105%, to $1.4 billion in 2016 compared to $663 million in 2015. This increase was driven primarily by the addition of $487 million of revenues related to the newly acquired Wyle and KTS in the third quarter of 2016 and $148 million of revenue associated with continued expansion under existing U.S. government contracts. A favorable settlement with the U.S. government on reimbursement of $33 million in previously expensed legal fees plus interest related to the sodium dichromate case and the approval of a change order on a road construction project in the Middle East also contributed to this increase.

GS gross profit increased by $140 million, to a profit of $137 million in 2016 compared to a loss of $3 million in 2015. This increase was primarily due to the continued expansion under existing U.S. government contracts, acquisitions, the favorable settlement and the approval of the change order discussed above.

GS equity in earnings in unconsolidated affiliates decreased by $6 million, or 13%, to $39 million in 2016 compared to $45 million in 2015. This decrease was primarily due to reduced equity earnings from the construction phase of a U.K. MoD project that was substantially completed in 2015.

GS revenues increased by $25 million, or 4%, to $663 million in 2015 compared to $638 million in 2014. This increase was primarily due to the expansion of existing U.S. government contracts, partially offset by the effect of reduced troop numbers on services under U.K. MoD and NATO contracts in Afghanistan. Revenues were also positively impacted by favorable settlement of disputes with the U.S. government on some of our legacy projects.

GS gross loss decreased by $29 million, or 91%, to a loss of $3 million in 2015 compared to a loss of $32 million in 2014. This improvement was driven by increased activity on U.S. government contracts discussed above, partially offset by the reduction in Afghanistan-related support activities. The positive impact of the favorable settlement of disputes with the U.S. government on some of our legacy projects includes the recognition of $18 million in legal fees related to these legacy contracts during 2015.

GS equity in earnings in unconsolidated affiliates decreased by $28 million, or 38%, to $45 million in 2015 compared to $73 million in 2014. This decrease was driven primarily by an insurance recovery on a joint venture for a U.K. MoD project in 2014 that did not recur in 2015 as well as the impact of reaching substantial completion of construction activities on this project.

Technology & Consulting

T&C revenues increased by $23 million, or 7%, to $347 million in 2016 compared to $324 million in 2015 due to an increase in proprietary equipment sales offset by lower engineering and technology license fee revenues related to several petrochemicals, ammonia and refining projects. The three technology companies acquired in the first quarter of 2016 contributed $28 million in revenues during 2016.

T&C gross profit decreased by $4 million, or 5%, to $73 million in 2016 compared to $77 million in 2015 due to lower profitability on the proprietary equipment sales versus technology license fees.

T&C revenues decreased by $29 million, or 8%, to $324 million in 2015 compared to $353 million in 2014 due to a decrease in proprietary equipment sales and awards of new consulting contracts from upstream oil projects partially offset by higher technology revenues related to several petrochemicals, ammonia and refining projects.

T&C gross profit increased by $24 million, or 45%, to $77 million in 2015 compared to $53 million in 2014 due to higher profitability on the mix of projects executed, a larger number of license milestones achieved and significant overhead reductions during 2015.

Engineering & Construction

E&C revenues decreased by $1.1 billion, or 32%, to $2.4 billion in 2016 compared to $3.5 billion in 2015. This decrease was primarily due to the elimination of $367 million of revenues resulting from the deconsolidation of our Industrial Services Americas business in the third quarter of 2015, as well as reduced activity and the completion or near completion of several projects in Australia, U.S. and Europe including our two LNG projects in Australia and an EPC ammonia project. These decreases were partially offset by new chemical and various other projects in the U.S. and a new oil and gas project in Europe.


36


E&C gross profit decreased by $217 million, or 97%, to $7 million in 2016 compared to $224 million in 2015. This decrease was primarily due to increased costs of $114 million resulting from the mechanical failure of a vendor supplied compressor and pumps during commissioning as well as various mechanical issues encountered during start-up on an EPC ammonia project in the U.S., reduced activity on an LNG project in Australia and the deconsolidation of our Industrial Services Americas business discussed above. Gross profit was also impacted by cost increases of $112 million resulting from significant weather delays and less than expected construction productivity rates on a downstream EPC project in the U.S. These decreases were partially offset by a settlement on closeout of an LNG project in Africa of $64 million as well as reduced overhead costs resulting from our previously announced restructuring plan.

E&C equity in earnings in unconsolidated affiliates decreased by $52 million, or 50%, to $52 million in 2016 compared to $104 million in 2015. The decrease was due to a non-recurring $15 million favorable adjustment recognized in the second quarter of 2015 on our offshore maintenance joint venture in Mexico, as well as lower progress and increased reimbursable cost estimates on an LNG project joint venture in Australia which reduces percentage of completion and delays profits into future periods.

E&C revenues decreased by $1.1 billion, or 25%, to $3.5 billion in 2015 compared to $4.6 billion in 2014. This decrease resulted primarily from reduced activity on a major LNG project in Australia, the completion of Canadian pipe fabrication and module assembly projects which had peak activity in 2014, reduced activity in the construction market and the elimination of revenues resulting from the deconsolidation of our Industrial Services Americas business during the third quarter.

E&C gross profit increased by $83 million, or 59%, to $224 million in 2015 compared to $141 million in 2014. This increase was primarily due to Canadian pipe fabrication and module assembly projects, which had profit in 2015 resulting from negotiated settlements and closeout activities compared to recognition of losses in 2014, and reduced overheads in 2015. This increase was partially offset by reduced activity on a major LNG project in Australia.

E&C equity in earnings in unconsolidated affiliates increased by $14 million, or 16%, to $104 million in 2015 compared to $90 million in 2014. The increase was primarily attributable to our offshore maintenance joint venture in Mexico, which had increased earnings in 2015 due to the vessels being in dry dock during 2014 and the non-recurring $15 million favorable adjustment associated with our Mexican joint venture. The increase was partially offset by reduced earnings on an LNG project joint venture in Australia and reduced earnings on our ammonia plant joint venture in Egypt.

Non-strategic Business

Non-strategic Business revenues decreased by $445 million, or 68%, to $210 million in 2016 compared to $655 million in 2015. This decrease was due to the elimination of revenues of $178 million due to the sale of the Building Group and Infrastructure Americas businesses in the second and fourth quarters of 2015, respectively, and the completion or near completion of several EPC power projects as we exit that business.

Non-strategic Business gross profit decreased by $132 million to a loss of $105 million in 2016 compared to a profit of $27 million in 2015. This decrease was primarily due to increased forecasted costs of $117 million to complete a power project due to poor subcontractor construction productivity, resulting schedule delays and changes in the project execution strategy.

Non-strategic Business revenues decreased by $136 million, or 17%, to $655 million in 2015 compared to $791 million in 2014. This decrease was due to the sale of Building Group in the second quarter of 2015 and the near completion of several power and construction projects partially offset by increased activity on power and infrastructure projects that began in the second half of 2014.

Non-strategic Business gross profit increased by $254 million to a profit of $27 million in 2015 compared to a loss of $227 million in 2014. This increase was due to non-recurring charges recognized during 2014 on a power project, improved performance and favorable settlements on power projects in the third quarter of 2015 as well as overhead savings resulting from the Building Group sale mentioned above and headcount reductions which began in late 2014.


37


Changes in Project-related Estimates

With a portfolio of more than one thousand contracts, we generally realize both lower and higher than expected margins on projects in any given period due to judgments and estimates inherent in revenue recognition for our contracts. We recognize revisions of revenues and costs in the period in which the revisions are known. This may result in the recognition of costs before the recognition of related revenue recovery, if any.

During the year ended December 31, 2016, we recognized unfavorable changes in estimates of losses of $231 million on an EPC ammonia project and a power project within our E&C and Non-strategic Business segments. We also recognized a decrease in gross profit of $112 million on a downstream EPC project in the U.S. which resulted in this project becoming a loss project. See Note 2 to our consolidated financial statements for additional information related to changes in project-related estimates. Information discussed therein is incorporated by reference into this Part II, Item 7.

In addition to the changes in project-related estimates discussed above, we have recorded contract price adjustments in the estimates of revenues and costs at completion on the Ichthys LNG project which we believe we are contractually entitled to but our client has disputed. The client has agreed to a contractual mechanism (“Deed of Settlement”) to facilitate the continuation of work under the contract while we work to resolve this dispute. See Note 6 for additional information related to the unapproved change orders and claims related to the Ichthys project. Information discussed therein is incorporated by reference into this Part II, Item 7.

Acquisitions, Dispositions and Other Transactions

Information relating to various acquisitions, dispositions and other transactions is described in Notes 3, 8 and 11 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 dollar amount of revenues we expect to realize in the future as a result of performing work on contracts and our pro-rata share of work to be performed by unconsolidated joint ventures. We generally include total expected revenues in backlog when a contract is awarded under a legally binding agreement. In many instances, arrangements included in backlog are complex, nonrepetitive and may fluctuate over the contract period due to the release of contracted work in phases by the customer. Additionally, nearly all contracts allow customers to terminate the agreement at any time for convenience. Where contract duration is indefinite and clients can terminate for convenience without compensating us for periods beyond the date of termination, backlog is limited to the estimated amount of expected revenues within the following twelve months. Certain contracts provide maximum dollar limits, with actual authorization to perform work under the contract agreed upon on a periodic basis with the customer. In these arrangements, only the amounts authorized are included in backlog. For projects where we act solely in a project management capacity, we only include the expected value of our services in backlog.

In connection with our acquisitions of Wyle and HTSI, we determined that our then-existing backlog policy differed from those utilized by Wyle and HTSI. We concluded that the methodology utilized by Wyle and HTSI provided a better estimate of future revenues, and accordingly, we modified our backlog policy for U.S. government contracts in our GS business segment to reflect both the funded and unfunded portions of future revenue from existing contracts for which the customer has determined scope and price. We define backlog, as it relates to U.S. government contracts, as our estimate of the remaining future revenue from existing signed contracts over the remaining base contract performance period (including customer approved option periods) for which work scope and price have been agreed with the customer. We define funded backlog as the portion of backlog for which funding currently is appropriated, less the amount of revenue we have previously recognized. We define unfunded backlog as the total backlog less the funded backlog. Our previous backlog policy for U.S. government contracts only included estimated future revenues for which funding had been appropriated by the customer. Our GS backlog does not include any estimate of future potential delivery orders that might be awarded under our government-wide acquisition contracts, agency-specific indefinite delivery/indefinite quantity contracts, or other multiple-award contract vehicles nor does it include option periods that have not been exercised by the customer. The modification to our backlog policy did not have a material impact to our historical GS backlog when implemented in the period ended September 30, 2016.

Within our GS business segment, we calculate estimated backlog for long-term contracts associated with the U.K. government's PFIs based on the aggregate amount that our client would contractually be obligated to pay us over the life of the project. We update our estimates of the future work to be executed under these contracts on a quarterly basis and adjust backlog if necessary.


38


We have included in the table below our proportionate share of unconsolidated joint ventures' estimated revenues. 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 $7.4 billion at December 31, 2016 and $8.5 billion at December 31, 2015. We consolidate joint ventures which are majority-owned and controlled or are variable interest entities ("VIEs") in which we are the primary beneficiary. 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 $151 million at December 31, 2016 and $285 million at December 31, 2015.

The following table summarizes our backlog by business segment:
Dollars in millions
December 31, 2015
 
New Awards
 
Other (a)
 
Net Workoff (b)
 
December 31, 2016
Government Services
$
6,516

 
$
1,847

 
$
856

 
$
(1,398
)
 
$
7,821

Technology & Consulting
430

 
228

 
2

 
(347
)
 
313

Engineering & Construction
5,148

 
526

 
(501
)
 
(2,404
)
 
2,769

Subtotal
12,094

 
2,601

 
357

 
(4,149
)
 
10,903

Non-strategic Business
239

 
—

 
6

 
(210
)
 
35

Total backlog
$
12,333

 
$
2,601

 
$
363

 
$
(4,359
)
 
$
10,938

 
(a)
Other includes adjustments for (i) backlog acquired from acquisitions during the period of $1.0 billion, (ii) effects of changes in foreign exchange rates, primarily related to adverse movements in the British pound of $(1.1) billion, (iii) changes in scope on existing projects of $2.1 billion and (iv) elimination of our proportionate share of revenue workoff from our unconsolidated joint ventures of $(1.7) billion less equity in earnings
(b)
These amounts represent the revenue workoff on our projects plus equity earnings from our unconsolidated joint venture projects.

We estimate that as of December 31, 2016, 38% of our backlog will be executed within one year. Of this amount, 62% will be recognized in revenues on our consolidated statement of operations and 38% will be recorded by our unconsolidated joint ventures. As of December 31, 2016, $248 million of our backlog relates to active contracts that are in a loss position.

As of December 31, 2016, 16% of our backlog was attributable to fixed-price contracts, 55% was attributable to PFIs and 29% of our backlog was attributable to cost-reimbursable contracts. For contracts that contain both fixed-price and cost-reimbursable components, we classify the individual components as either fixed-price or cost-reimbursable according to the composition of the contract; however, for smaller contracts, we characterize the entire contract based on the predominant component. As of December 31, 2016, $7.1 billion of our GS backlog was currently funded by our customers.

Liquidity and Capital Resources

Engineering and construction projects generally require us to provide credit support for our performance obligations to our customers in the form of letters of credit, surety bonds or guarantees. Our ability to obtain new project awards in the future may be dependent on our ability to maintain or increase our letter of credit and surety bonding capacity, which may be further dependent on the timely release of existing letters of credit and surety bonds. As the need for credit support arises, letters of credit will be issued under our $1 billion Credit Agreement or arranged with our banks on a bilateral, syndicated or other basis. We believe we have adequate letter of credit capacity under our existing Credit Agreement and bilateral lines, as well as adequate surety bond capacity under our existing lines to support our operations and current backlog for the next 12 months.
Cash generated from operations and our Credit Agreement are our primary sources of liquidity.  Our operating cash flow can vary significantly from year to year and is affected by the mix, terms, timing and percentage of completion of our engineering and construction projects.  We sometimes receive cash in the early phases of our larger engineering and construction fixed-price 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 Credit Agreement to satisfy any periodic operating cash requirements for working capital, as we frequently incur costs and subsequently invoice our customers. We believe that existing cash balances, internally generated cash flows and our Credit Agreement availability are sufficient to support our day-to-day domestic and foreign business operations for at least the next 12 months.

39


Cash and equivalents totaled $536 million at December 31, 2016 and $883 million December 31, 2015 and consisted of the following:
 
December 31,
Dollars in millions
2016
 
2015
Domestic cash
$
249

 
$
360

International cash
231

 
470

Joint venture cash
56

 
53

Total
$
536

 
$
883


Our cash balances are held in numerous accounts throughout the world to fund our global activities. Domestic cash relates to cash balances held by U.S. entities and is largely used to support project activities of those businesses as well as general corporate needs such as the payment of dividends to shareholders, repayment of debt and potential repurchases of our outstanding common stock.

Our international cash balances may be available for general corporate purposes but are subject to local restrictions, such as capital adequacy requirements and local obligations, including maintaining sufficient cash balances to support our underfunded U.K. pension plan and other obligations incurred in the normal course of business by those foreign entities. Repatriated foreign cash may become subject to U.S. income taxes. During 2016, as a result of strategic business acquisitions and previously announced estimated contract losses, we reevaluated our permanent reinvestment assertion of certain undistributed foreign earnings. As a result, we provided cumulative income taxes of $51 million on certain foreign earnings which provide us, if necessary, the ability to repatriate an additional $300 million of international cash without recognizing additional tax expense. As of December 31, 2016, we have repatriated approximately $93 million of this international cash. See Note 14 to our consolidated financial statements for further discussion regarding undistributed foreign earnings.

Joint venture cash balances reflect the amounts held by joint venture entities that we consolidate for financial reporting purposes. These amounts are limited to joint venture activities and are not readily available for general corporate purposes; however, portions of such amounts may become available to us in the future should there be a distribution of dividends to the joint venture partners. We expect that the majority of the joint venture cash balances will be utilized for the corresponding joint venture projects.
  
As of December 31, 2016, substantially all of our excess cash was held in commercial bank time deposits or interest bearing short-term investment accounts with the primary objectives of preserving capital and maintaining liquidity.
Cash Flows
Cash flows activities summary
 
 
 
 
 
 
 
 
Years ended December 31,
Dollars in millions
 
2016
 
2015
 
2014
Cash flows provided by operating activities
 
$
61

 
$
47

 
$
170

Cash flows (used in) provided by investing activities
 
(981
)
 
101

 
(44
)
Cash flows provided by (used in) financing activities
 
584

 
(192
)
 
(210
)
Effect of exchange rate changes on cash
 
(11
)
 
(43
)
 
(52
)
Decrease in cash and equivalents
 
$
(347
)
 
$
(87
)
 
$
(136
)

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 engineering and construction projects. Working capital requirements also vary by project depending on the type of client and location throughout the world. Most contracts require payments as the projects progress. Additionally, certain projects receive advance payments from clients. A normal trend for these projects is to have higher cash balances during the initial phases of execution which then decline to equal project earnings at the end of the construction phase. As a result, our cash position is reduced as customer advances are worked off, unless they are replaced by advances on other projects.


40


The primary components of our working capital accounts are accounts receivable, which includes retainage and trade receivables, costs and estimated earnings in excess of billings on uncompleted contracts ("CIE"), accounts payable and billings in excess of costs and estimated earnings on uncompleted contracts ("BIE"). 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 $61 million in 2016, primarily resulting from favorable net changes of $156 million in working capital balances for projects which were partially offset by a decrease in cash resulting from a net loss in 2016 as well as cash used in the items specified below:

•
Accounts receivable is impacted by the timing and collections on billings to our customers. The decrease in accounts receivable in 2016 is primarily due to collections from customers on three large EPC projects within our E&C business segment as well as collections of retainage and trade receivables associated with the substantial completion of a power project within our Non-strategic business segment. We also increased collections from customers on various projects in our T&C business segment. These decreases in accounts receivable were partially offset by increased billings on various Wyle and KTS projects and the expansion of existing U.S. government and other contracts within our GS business segment in 2016.
•
Our CIE was impacted by the timing of billings to our customers and is generally related to our cost reimbursable projects where we bill as we incur project costs. In 2016, CIE decreased in our T&C and E&C business segments and was partially offset by the expansion of existing U.S. government and other projects in our GS business.
•
Accounts payable is impacted by the timing of receipts of invoices from our vendors and subcontractors and payments on these invoices. The increase in accounts payable in 2016 was primarily due to a U.S. government project and other projects from the Wyle and KTS acquired within our GS business segment as well as the timing of invoicing and payments within the normal course of business.
•
BIE is associated with our fixed price projects, which we generally structure to be cash positive, and is impacted by the timing of achievement of billing of milestones and payments received from our customers in advance of incurring project costs. The increase in BIE is due primarily to increases associated with two EPC ammonia projects in the U.S. in our E&C business segment partially offset by decreases from various projects in our T&C business segment and a power project in our Non-strategic business unit.
•
In addition, we received distributions of earnings from our unconsolidated affiliates of $56 million and contributed $41 million to our pension funds in 2016.
Cash provided by operations totaled $47 million in 2015. Cash generated from our earnings and net changes in working capital balances for projects remained relatively flat in 2015. The cash generated by earnings was partially offset by the other items as specified below:

•
Accounts receivable decreased primarily due to the timing of collections on customer billings related to projects within our E&C business segment including an EPC LNG project in Australia as well as several EPC power projects in the U.S. in our Non-strategic business segment.
•
The decrease in CIE primarily reflected the timing of billings as we substantially completed execution of several major EPC projects within our E&C business segment. Additionally, CIE decreased on various projects in Canada prior to the deconsolidation of our Industrial Services Americas business in the third quarter of 2015.
•
Accounts payable decreased in 2015 due to the timing of invoicing and payments within the normal course of business on an EPC LNG project in Australia and several EPC projects in the U.S. within our E&C business segment. Also contributing to the decrease were certain projects in Canada from our Industrial Services Americas business as well as various projects in the U.K. in our GS business segment and a power project in our Non-strategic business segment.
•
In 2015, we received distributions of earnings from our unconsolidated affiliates of $92 million. We used $44 million for the net settlement of derivative contracts and contributed approximately $48 million to our pension funds in 2015.
Cash provided by operations totaled $170 million in 2014. We generated cash from the net changes in working capital balances for projects of approximately $197 million in 2014. The cash generated by earnings was partially offset by the other items as specified below:


41


•
Accounts receivable decreased primarily due to the timing of collections on customer billings related to projects within our E&C business segment including an LNG project in Africa that was nearing completion and various other projects in Canada and the U.S.
•
The increase in CIE in 2014 primarily reflected the timing of billings as we substantially completed execution of major projects within our E&C business segment partially offset by increases on U.S government contracts in our GS business segment.
•
BIE increased in 2014, reflecting the timing of our achievement of billing milestones and the receipt of payment in advance of incurring costs related to a power project within our Non-strategic Business segment as well as several projects in our E&C business segment.
•
We received distributions of earnings from our unconsolidated affiliates of $249 million. We used $40 million for the net settlement of derivative contracts and contributed approximately $48 million to our pension funds in 2014.
Investing activities. Cash used in investing activities totaled $981 million in 2016 and was primarily due to the $911 million used in the acquisitions of Wyle and HTSI within our GS business segment and the acquisition of the three technology companies in our T&C business segment. We also invested an additional $56 million in the Brown & Root Industrial Services joint venture in North America within our E&C business segment for its acquisition of a turnaround and specialty welding company.

Cash provided by investing activities totaled $101 million in 2015 and was primarily due to proceeds from the sale of assets and investments within our Non-strategic Business segment.

Cash used in investing activities totaled $44 million in 2014 which was primarily due to purchases of property, plant and equipment associated with information technology projects which have now largely been canceled.

Financing activities. Cash provided by financing activities totaled $584 million in 2016 primarily due to $700 million in cash proceeds from borrowings under our Credit Agreement. These sources of cash were partially offset by payments on borrowings of $50 million and dividend payments to shareholders of $46 million.

Cash used in financing activities totaled $192 million in 2015 and included $40 million for our purchase of a noncontrolling interest in a joint venture, $47 million for dividend payments to shareholders, $62 million for the purchase of treasury stock and $28 million for distributions to noncontrolling interests.

Cash used in financing activities totaled $210 million in 2014 and included $106 million for the purchase of treasury stock, $47 million for dividend payments to shareholders and $61 million for distributions to noncontrolling interests. The uses of cash were partially offset by $10 million of investments from noncontrolling interests and $4 million of proceeds from the exercise of stock options.

Future sources of cash. We believe that future sources of cash include cash flows from operations, cash derived from working capital management, cash borrowings under our Credit Agreement and other permanent financing activities, as well as potential litigation proceeds including potential settlement of the PEMEX litigation discussed in Note 16 to our consolidated financial statements.

Future uses of cash. We believe that future uses of cash include working capital requirements, funding of recognized project losses, capital expenditures, dividends, repayments of borrowings under our Credit Agreement, 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 fund pension obligations, payments under operating leases and various other obligations, including potential litigation payments, as they arise.

Other factors potentially affecting liquidity

Cash from operations can be significantly impacted by our primary working capital accounts as previously described. We expect unfavorable working capital impacts in 2017 related to project losses in our E&C business segment. These impacts on liquidity could be mitigated by proceeds from resolution of the EPC1 matter. See Note 16 to our consolidated financial statements under PEMEX and PEP Arbitration for further discussion.


42


Credit Agreement

Information relating to our Credit Agreement is described in Note 13 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 13 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. Information relating to our nonrecourse project debt is described in Note 13 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.

Commitments and other contractual obligations. The following table summarizes our significant contractual obligations and other long-term liabilities as of December 31, 2016:
 
Payments Due
Dollars in millions
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Operating leases (a)
$
97

 
$
85

 
$
75

 
$
66

 
$
61

 
$
324

 
$
708

Purchase obligations (b)
8

 
6

 
5

 
3

 
3

 
1

 
26

Pension funding obligation (c)
36

 
35

 
35

 
35

 
35

 
240

 
416

Revolving credit agreement
—

 
—

 
—

 
650

 
—

 
—

 
650

Interest (d)
15

 
15